What is money? Where does it come from? And how did it end up the way it is today? In this episode of Industry Focus: Wildcard, NPR’s Jacob Goldstein joins Motley Fool contributor Jason Hall and Industry Focus host Nick Sciple to discuss his work on the Planet Money podcast and his new book, Money: The True Story of a Made-Up Thing. Topics include: How Planet Money selects and develops podcast topics, where money comes from, bitcoin, the future of money, and more!
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This video was recorded on January 20, 2021.
Nick Sciple: Hey, everybody, Nick Sciple here. I’ve got a really exciting show for you this week. Jason Hall and I sat down with Jacob Goldstein from the Planet Money podcast, to talk about his book Money: The True Story of a Made-Up Thing, talk a lot about the types of projects they work on at Planet Money, the history of money, bitcoin, and lots more. Stay tuned, it’s a really great interview. Jacob, thanks so much for joining us on the podcast today.
Jacob Goldstein: Oh, I’m delighted to be here. Thanks for having me.
Sciple: Great to have you on the show. We were talking about before the show started, Jason and I are both big fans of NPR. I feel like we were talking to the big leaguers. In the podcast game, you’ve been involved with Planet Money for a long time. How did you first get involved with podcasting and with Planet Money specifically?
Goldstein: What happened at the same time basically, I was a reporter at the Wall Street Journal. I was covering healthcare there. I wrote a blog, remember blogs, for The Wall Street Journal. Planet Money actually also had a blog, remember blogs, this was 2010, and they hired me to write their blog. I went there. Of course, the reelection of Planet Money is the podcast and it was exciting to be there and I learned how to make podcasts, and now that’s my job.
Sciple: I think one of the things that I like a lot about Planet Money, I know a lot of listeners do too, is how you make finance and economics relatable. How do you look for topics to cover? What goes into your process of figuring out what you want to talk about for an episode?
Goldstein: I think a big part of it is making the leap from a topic to a story, there’s a lot of subjects. You could do the Wikipedia e-explainer. But the thing we try and find is something where there’s a narrative. Like a story you could tell, where there’s a person or some group of people, and the person sets out and has some kind of problem, and then solves the problem and has some insight and then sees the world in a new way. In the arc of whatever that story is, you can talk about intellectual property or equities or whatever, you can talk about anything. But if you put it inside of a story that has a chronology and a character, then it’s much easier for people to listen to, especially people who don’t think they’re interested in economics or finance or whatever. Humans just like stories.
Jason Hall: I think one of the challenging things with telling stories in the podcast format is it’s harder. Especially when you’re taking on some of the really complex and complicated topics that Planet Money covers. One thing I’m really interested to learn more about is your process. You have a great idea and there’s a great narrative there, there’s a great story to tell. But then let’s say you want to talk about how oil moves from every part of the value chain, you can’t just sit down and figure that out the morning of and then record a 20-minute podcast about it. It takes months sometimes it seems, so I’m really curious to hear how from the beginning of the concept through developing a finished episode, how does that work?
Goldstein: Well, it varies. You mentioned oil and I don’t know if you were thinking of this, but we did a project a few years ago where we actually bought some relatively small amount of oil, some number of barrels of oil.
Hall: One of my favorite episodes, I watched that.
Goldstein: That was a long project and it took a long time. Obviously, it’s a nightmare for NPR’s lawyers. They were like, “What? You want to buy oil? No, that’s a bad idea.” We found some guy, basically a farmer in Kansas who has these little stripper wells, which is like little, mini oil wells that get the bare minimum of oil out of the ground. We did that, A, because no real company would sell us oil, and B, because he’s a real person. He’s a person you can meet unlike trying to meet whatever, ExxonMobil. Like, “Hi, ExxonMobil, let’s shake hands.”
Hall: Nobody wants to shake ExxonMobil’s hand.
Goldstein: Especially now. 10 years ago, maybe. But today, not so much. Then we had a whole thing where we followed the truck and went to a refinery and we talked about refining. A project like that took at least months. At the other end of the spectrum, I did a show last month. Whenever the Federal government filed the antitrust suit against Facebook. I’ve covered antitrust on the show before, so I know the context pretty well, I know the experts. That show, we did it in a couple of days. One thing we do that’s useful is, think a lot about the structure, think about how it is going to go. Don’t just talk about the thing for a half hour. Then, we do these nice, I don’t know if this is too insidery or whatever, but we do group edits. Basically, after we have the tape, the recording we’re going to have, we write a script, we figure out what cuts, what recordings we’re going to use. Then we actually read the story aloud for our colleagues, maybe five people or so will listen in. They just hear it as if they’re a podcast listener, but I’m just saying it and playing the tape. Then they give notes, like, “This part is in the wrong place, this part is confusing, this part’s boring.” whatever, and you fix it. That process, I really like and find it helps to make the show better.
Sciple: You mentioned the editing process and that ties into the question I wanted to ask you, because you talk about telling these stories and bringing these stories home for folks. But I’m sure there’s some interesting stories that have gotten lost in that editing process that just didn’t make the cut. Can you think of an interesting story that didn’t make the cut and tell us about that?
Goldstein: It’s funny you mentioned that. One of the producers on our team, just the other day, was suggesting we do an episode that he called ‘scrapple.’ Scrapple, I guess, is like a regional delicacy. It sounds like you guys know better than I do, you put a bunch of leftover stuff in the pan and cook it up or something. Is that right?
Sciple: It’s like a breakfast protein type thing, but I’m not 100% sure what’s in it either.
Goldstein: I’m sure you’ll get some emails explaining what scrapple is, you can tell me. But his basic idea was like, “Last year was crazy, we’re doing all these shows.” If you have a half-finished thing, something that didn’t make it onto the air, maybe we could do like a bunch of those in a show, put them in the pan and make a show. The one I have for that actually, we actually interviewed a guy. This was last spring, maybe this was May, lockdown crazy, whatever. I interviewed this DEA agent, Drug Enforcement Agency agent out in California about this really interesting story that never made it onto the show. What happened was, in Southern California, lots of drug gangs apparently use wholesale stores, just like markets in downtown L.A., to launder their money. They have this problem. They sell drugs for dollars, they need to get their money back to Mexico. But Anti Money-Laundering laws in the U.S. and Mexico make that difficult. They had set up these stores in L.A. where in some way, I forget the details, they use the stores to launder their drug gains back to Mexico. But when California stores shut down last spring, the drug dealers were screwed. They had all this money, they were still selling drugs and getting money, but they had these piles of dollar bills that they could no longer launder. In just a few weeks last spring, the DEA seized millions of dollars in cash from the drug dealers who had this funny problem of too much money and nowhere to put it.
Why didn’t we do that? I don’t know, we just had the one DEA guy, we’re doing lots of other stories. It was a really urgent time, there was lots of news. That story felt by the wayside, but it’s amazing. There’s actually this whole amazing network that runs among China where apparently, is it fentanyl, raw drug ingredients get made basically. Mexico and the U.S., there’s this whole thing, like a triangle market. One of the things the DEA guy said was, “Drug dealers sell drugs for dollars, but then they have this problem where they have to get rid of their dollars.” The idea that that’s a problem is really a fun starting place for a story that I never made.
Hall: One of the interesting things that I’m looking forward to seeing is, I think Planet Money does a great job of talking about things that are also relatively interesting in the moment, but also things that are timeless too. There’s this really interesting balance that you folks do, so I’m interested to see the things coming out of this period in time that you do next year, or the year after that, that had their roots in this pandemic. But with that in mind, I’m curious to hear, what’s the story that you were involved with that just surprised you the most?
Goldstein: It’s interesting. Surprise is something we always are looking for. I’ll tell you one, this one I liked it so much, I actually put it in the book as well. What’s the way in? Well, so there’s this great big idea in economics that sounds boring when you say it. The great big idea in economics is like the most important thing in the world is productivity gains. Productivity is this word, it sounds like you’re talking about making checklists or something. It’s this very boring word. But in economics, it’s the idea that you can get more output for the same amount of input. Or a better way to say this, for the same amount of work, you can make more of that stuff. That is the only way in the long run that the well-being of an entire society can go up, that’s it. Productivity gains are all we have got in the long run. It’s basically the fundamental idea in economics, but it’s like a boring inert idea. It’s this sort of topic but not a story problem.
I found some years ago this work by this economist named Bill Northouse at Yale, he subsequently won the Nobel Prize. It has nothing to do with the fact that I did the story, it wasn’t even for the same work. He did this work early in his career where he looked at artificial light, like lighting up a room. Now, it’s electricity. It used to be whatever, whale oil lamps thousands of years ago in ancient Babylon, the sesame oil. He asked this question that he did it in a math-y way. But you can restate it as, if a normal person works all day, how long can they light up a room for? You spent a whole day’s wages to buy light, to turn on a lamp in your room. If you’ve spent a day’s wages to turn on a lamp in your room, how long can you leave it on for? How much light does a day’s wages buy? He did all this cool stuff. He had some colleagues who studied ancient Babylon and figured out basically how much workers got. He bought an ancient style oil lamp and sesame oil, and then borrowed a light meter from a janitor at Yale to figure out how much light the oil lamp gave off. What he figured out was for essentially all of recorded history, how much light can you buy with a day’s work? He found that if you went to ancient Babylon, it was something terrible. I don’t have it for me. I think 10 minutes. A whole day’s work, you can light up a room for 10 minutes. Basically, everybody lived in the dark. It’s just got dark, really dark at night. You go for a long time. It’s still really expensive. In 1800, when they were using whale oil, sorry, whales, it was an hour. Still, basically nothing. Still light is this extraordinarily luxurious thing that only really rich people can have in any abundance at night.
Then you have the Industrial Revolution, beginning around 1800, of this nonstop productivity gains that importantly you didn’t have before that. We take for granted that at least in the long run things get better. We might have periods of stagnation or inequality, but overall, we expect material improvements. But that was not the historical norm for thousands of years. But the Industrial Revolution hits, that starts and you really see it in light. You go from an hour to five hours in 1850. Then of course, you get the light bulb and you get power grids. This is even before LEDs, he did this in the ’90s. By the ’90s, you’ve gone from 10 minutes of light for a day’s work to an hour, to five hours. Then by the end of the 20th century, you get say, 20,000 hours. You get just some absurd amount of light. What that shows you, what that story tells you is, we are so much better off in material terms than people used to be, that it’s bizarre, it’s obscene. It’s beyond what even we think. One lesson is that our material needs are really well met. Obviously, there’s still inequality, there are environmental consequences. The other really important insight from that, that I think is paired with the idea of productivity growth and it’s the big insight of economics for me is everybody can have more. That chapter in the book, I think I called it “Everybody can have more money.”
Hall: That’s my favorite chapter in the book.
Hall: Yeah, it’s my favorite chapter in the book. I want to say too, your book is worth buying just for the illustration, just for that graph, that shows how much more light people can buy. You’d look at a page and it starts and then you look at the next page and the chart is still going up. You look at the next page and then hey, you’re not quite done. It’s still going higher. [laughs] It’s remarkable how that visual representation reflects how for thousands and thousands of years, there was essentially no change. Then overnight, it […] just like that.
Goldstein: One really important thing to me that follows from that is the cliche way of saying it is the pie can get bigger or the world can be a positive sum. What it means is one person can have more without somebody else having less. That’s really profound and I think not intuitive. I feel like we’re wired to believe that if somebody else is getting more, they must be taking it away from somebody else. If somebody’s getting richer, someone else must be getting poorer. Clearly, that happens sometimes, but it doesn’t have to happen in that way. In the long run, that has not been the case. That’s a huge deal, a huge insight into the way the world can work. Because I think it’s really easy to get stuck in a zero sum thinking, which is not a nice way to live. I’d way rather believe in a positive sum world than a zero sum world. Also, it’s true, or at least potentially true.
Hall: I think this is a perfect transition to the book. Because this addresses how money has changed and how we don’t have to view it as a zero sum thing. Nick?
Sciple: Yeah. That’s what I was going to say. I think it’s a good time to transition to the book. You talk about this as the positive sum nature of exchange and that medium of exchange is money. What first got you interested? Obviously, you’ve written a book about it. What got you interested enough in money to write a book about this topic?
Goldstein: Well, there’s different answers to that question. The one I tell in the book is it goes back to the financial crisis of 2008. At that time, I was still working at the Wall Street Journal, but I was covering healthcare. I didn’t know that much about finance, basically, I read the paper. But I had never really paid that much attention to money. I think like a lot of reporters I had a little weariness of money, like “Sure, I want to make a living, but I don’t want to be too interested in money because I don’t want to be greedy or something like that,” kind of an emotional response. But with the financial crisis, it was like, “Wait, something weird is happening with money, obviously.” I went out to dinner with my aunt, who was a businesswoman. She’d gotten her MBA at Wharton in the ’80s, but also had been an English major like I was. She felt like an approachable person to talk to about money. This was when the stock market had crashed and real estate prices had crashed. Literally, trillions of dollars in wealth had disappeared, which seems strange to me. Because what does that even mean? Where did he go? I asked her. She said, ”Look, that money, it was never really there in the first place. Money is just fiction. Money is just made up, basically.” Which is wound up being the core idea of this book that I wrote, 10 years later, and set me on the path. I think fiction is a thing I was interested in. I’d studied English in college and this idea, I guess, often, I think from the outside, I had thought of money as it’s a very math-y thing. It’s very core. I had associated it with selfishness and greed, finance people were math people who just wanted money for themselves. But as I learned more about money, what I realized is, that’s not really true. Importantly, the core fact of money is that it is this social invention. One person can’t invent money, that’s not money. One person can invent a steam engine or something and it works just fine. But for money to work as money, more or less everybody, many people need to agree that it is money. When you look at the history of money, it is this very social thing. I wanted to make money for poets, money as an interesting series of stories about human society.
Sciple: That raises the follow-up question. I feel like a little kid asking their parents, “Where does money come from?”
Goldstein: Where does money come from? There is a very compelling story that money comes from barter. This very compelling idea that, in the absence of money, people traded stuff, which was inconvenient because if you had something I wanted, I couldn’t just buy it from you. I also had to have something you wanted so that we could trade. If I didn’t, I would be screwed and you would be screwed because you would have this thing you wanted to sell to me, but there was no such thing as money so you’d be out of luck. That was the story people told about money for a long time. Then, what happened in the last several decades, century-ish, was anthropologists started going around the world and studying different cultures in different economic models. They never found that barter world existing. They started to say, wait a minute, maybe that barter story isn’t necessarily where money came from. What they found instead was, in small traditional societies, they’re places where people basically all know each other.
You think about tribal or kinship type of society. There are lots of really strict rules and norms about gift-giving and reciprocity, and when you have to give people stuff and when they have to give you stuff. The most prominent ones that seem to occur again and again in different societies are about marriage. If you’re going to marry somebody, it varies like how the gender dynamics work, but typically one side has to give the other side some amount of some prescribed thing, like cattle is a classic in a lot of places, but it can be different things, cowrie shells, boar tusks. Murder is another one. Exciting? If you kill someone, there are lots of rules about what you have to give their family. Those rules, and the things that those rules apply to cattle or cowrie shells or whatever, those seem like the real roots of money, which does fit nicely in this idea of money as this thing that arises out of social roles. It also, to me, and this is a little out there, but it helps me think about why people have such strong emotional responses to money. Clearly, there’s a rational reason to be preoccupied with money to some extent, because we need it and we want to have a house and food and whatever. But also a lot of the time our responses to money go beyond that rational amount. I think the deep roots of it speak to that.
Hall: I thought it was really interesting too from the book that — this crushed the soul of lots of English majors out there — written language was a product of accountants and not poets.
Goldstein: Yes. I was ultimately OK with it as an English major. The first writing, at least that we know of, is from Mesopotamia, classic cradle of civilization thousands of years ago, Sumaria. Basically, there’s a nice origin there too. Again, this is deep in the fog, but the story that I find compelling and that scholars seem to find compelling is people in that region, the Middle East, basically, would give each other ‘I Owe You’. They would put these clay little figures, like a clay ball, a clay disc or a little clay cone inside a clay ball. I don’t have it in front of me, but a cone represented maybe a sheep, one cone would be like six sheep or something. So you’d put a little clay cone inside a clay ball, and I would give it to you, and then you would lend me the six sheep. So, you would hold this ball like a claim check. The ball would be like, I owe you six sheep. You can break it up and be like, see, you owe me that six sheep, I got your little token. Then somebody figured out that you could press the clay cone into the outside of the clay ball. It’s clay, so when it’s soft, you can make an impression and it makes a little triangle. Now, you don’t have to break open the clay ball to see the ‘I owe you’ inside. You can say, “Look, my clay ball for you has a little triangle on it. You owe me six sheep, Goldstein.” Then they got a little more fine, the city started to grow, and there were these, what they were calling temple complexes. But I think of them like city hall, basically. These were like states run by religious leaders, city-states. There was like a scribe culture, a job as being a scribe, and they started just using some reed stylus to make marks on clay tablets that were also receipts, basically. That is really the first writing we know of. It is accounting. It’s so and so delivered a ball to the temple, or whatever. But I’m OK with it. I’m [laughs] going to read novels more than I’m going to read balance sheets, but it’s cool.
Sciple: You talk about balance sheets, so we want to know what people actually own and all those sorts of things, which ties into another theme that you have in the book, this idea that money is trust. Can you talk about that theme and how that applies to the development of money from these crude tablets to what we have today, which is a very robust financial system?
Goldstein: It is a robust financial system. It is also more dependent on trust than maybe ever. Once you get rid of gold, as we basically did in the 1930s, and then officially did in the ’70s, but really in the ’30s, there is nothing there. One of the really amazing things about money now, the stoner fact about money is, why is it worth anything? Because we all say it is. Maybe because the government will take it in taxes, but really because we all say it is. The only safety net is trust, basically. At this point, what we’re fundamentally trusting is, on one level, the government, on another level, just society. The dollar is really underpinned by America as a going concern.
Sciple: As you talk about this importance of trust, and there isn’t this necessity that the current financial system remains in place, you talked one point in the book about the example of China, one of the earliest economies that had paper money, and paper money didn’t last there, because trust in the system dissolved. Can you talk about that example and what that tells us about how financial systems can change over time?
Goldstein: That’s a really extraordinary story. To be honest, I’ve been at Planet Money for about 10 years when I started working on the book, a little less. I didn’t really know the China story until I was working on the book. What happened was, well, it starts around 1000 A.D. in the province of Sichuan where they actually were using iron for coins there. This, of course, is the era when the value of a coin is based on the value of the metal. In Europe at this point, they’re using a lot of silver coins, I think some gold at that point. In a lot of China, they’re using bronze, which is mostly copper, more valuable than iron. But in Sichuan, they didn’t have that much bronze. So, iron is like garbage money. It’s like all you’ve got his pennies or something. A pound and a half of iron coins would buy you a pound of salt. It’s literally less valuable than salt, is how bad your [laughs] money is. So these merchants, or merchant, we don’t know, in the capital of Sichuan, starts letting people leave their iron coins with him in exchange for a receipt, like a claim check, basically. Then people start using those paper claim checks to buy stuff. I don’t need to go get these 2,000 iron coins just to buy a pound of salt. I’ll just give you this claim check, you give me the salt and then if you want to get the iron coins, you can go get the iron coins. So, the claim check becomes money.
Hall: The birth of the checking account.
Goldstein: Well, it’s really the birth of paper money. The paper money, at the beginning, is like a paper check. Paper money, well, really until the 1930s is an ‘I owe you.’ People think of paper money as just a thing that represents some amount of gold. You can go to the merchant or the bank or the central bank and get gold. That’s all it was until then. The profoundness of that shift is really quite something. Well, except for a moment in China, which we’ll talk about in a sec. So, the Chinese see that paper money is a good idea. It spreads, even to the parts of China where they are using bronze coins. It helps to drive this really incredible economic revolution in China.
We were talking a few minutes ago about the Industrial Revolution that we all know about from high school or college or whatever. It started around 1800 in England. But China had a proto-industrial revolution hundreds of years before that, around 1000, 1100 A.D., where they had similar to what would happen in Europe hundreds of years later. They had scientific advancements, the magnetic compass and agricultural advances. They could grow far more rice and urbanization. Cities grew to a million people each, which was like 10X what they had in Europe at the time. There’s even accounts of restaurant scenes and picky hipsters going to restaurants in the capital of China at the time. It’s like this real flowering and paper money is part of that. It’s a technological advance, because you can move value around now way more easily. It’s a non industrial society, there’s no motor as transport, so it’s really hard to move coins all around the country. It’s heavy and paper is light. There was more trade and trade leads to more wealth, it’s great. It’s like this flowering of human civilization.
Then they get invaded by the Mongols, which seems not great. But the Mongols love paper money, they have this huge empire that expands Asia, basically, incredibly large and they’re nomadic. They’re going everywhere on their horses, that’s their whole game. They see that like, “Oh, money, in paper, amazing. We don’t have to like to load our horses down with all these coins. It’s a great way to move purchasing power and move value around.” They run with paper money and there is even this moment, hundreds of years in advance of the rest of the world, where Kublai Khan, grandson of Genghis Khan, decides paper money is just going to be paper. You’re not going to be able to get your bronze coins for it anymore. It basically works. There is this incredible fiat money moment in China in the late 1200s, early 1300s. Eventually, as you said, a new revolution pushes the Mongols out. The Ming dynasty takes over. The Ming Dynasty is basically reactionary. They don’t like all this money and markets, the way people are skeptical of Wall Street and banks. They think the farmer is the real ideal and the agricultural village is the real ideal. They get rid of paper money altogether. Nobody uses paper money for hundreds of years after that anywhere in the world, and China gets poorer as a result. China, not only stops getting richer, they actually get poorer. Which, going back to the earlier conversation we had about light and the increase in productivity and the world we live in and how used we are to that, one of the really chilling useful things about that China story is you can go backwards, you can get poorer. That is a thing that happens in the world. We shouldn’t take for granted the notion of economic growth, because it’s not given.
Hall: An observation I had on that. Then we want to move on to talk a little bit about bubbles. I think the loss of paper money and the other things that were going on with the Ming dynasty is it undermined specialization. When you undermine specialization, you limit all of those productivity gains. You limit an economy’s ability to advance and develop. What are your thoughts on that playing a role and how that’s tied to money? The two things, they’re very much interrelated, I think.
Goldstein: Yes, I agree. The word you didn’t say in there that I would add is trade. The nexus of all of those things is trade. The ideal that the Ming Dynasty, the rulers who got rid of paper money had was of the self sufficient agricultural village. You can see why that’s appealing. I feel like we have a romantic ideal still of self sufficiency, unlike the frontier and the village is good and the city is bad. I feel like there’s a very deep emotional connection to those ideas. But, nobody is good at making everything. If you just make what you’re good at and trade that or sell that to other people and other people make what they’re good at, then everybody can have more stuff. I understand that it’s not the optimal to have more stuff. But if we say better services, everybody can have enough food to eat. The reason hunger has diminished, there is still hunger in the world and that is a terrible thing. There is way less hunger in the world than there used to be because farmers are really good at farming and most people don’t have to farm anymore. Because productivity has gone up and the bigger the market is, the more people who are trading with each other, the more you can have specialization, the more productivity can go up, and the richer everybody can be. It goes back to the pie getting bigger.
Sciple: Yeah, so that abstraction that money gives you this ability that I can turn my labor into something that I can exchange for other things allows us to put our labor to the highest and best use, which encourages economic development. That’s fantastic.
Goldstein: Well said.
Sciple: On the other side of that, however, it allows opportunities for bubbles. I can invest in a company on the whole other side of the world. Someone in China can invest in, say, an electric vehicle company in America, or a renewable company or any of these things. Money makes that possible in a way that if I’m bartering, exchanging with you or those things you just can’t do. Can you talk about the role that financial bubbles have played in the history of money?
Goldstein: Yeah. Financial bubbles and the popping of them also.
Goldstein: Maybe my favorite one is in France in the early 1700s, and Europe Western, Europe around this time late 1600 early 1700, is really this extraordinary moment in history in general and in economic history in particular. It’s really the birth of modern financial capitalism in a lot of different ways. It’s when actually paper money is just getting to Europe in a similar way that it got invented in China. It’s getting reinvented. One of the earlier ones, just fun aside, is in Sweden. Where they used copper for money, similar to the iron. Copper, obviously not as valuable as gold or silver, so they would have these “coins” that were actually like several feet long and weighed like 30 pounds and people had to carry strapped to their backs. Maybe not surprising that that was the first place in Europe where they’re like, “You know what? Why don’t you leave this at a bank and we’ll give you some paper you can use in exchange for it.” Paper money is getting going at the Bank of England and England is invented, which is like a proto-central bank. You have joint stock companies which are essentially like the first multinational corporations with stock that people can trade. Particularly the Dutch East India Company is a really successful one.
You have to walk into this world. We were talking earlier in the show about going from a topic to the story and having a person. There’s this incredible person who walks into this world and does amazing things. His name is John Law. He’s born in Scotland in the 1600s. He moves to London as a young man and he’s this man about town. He chases women and drinks and gambles. As this person did at that time, he gets into a duel and he kills the other guy in the duel. He’s arrested and thrown in jail and convicted of murder and sentenced to death. Then he escapes from prison and sneaks off on a ship to Europe. Amazingly, he is this brilliant guy who does a bunch of things. He studies up on probability theory, which is brand new at the time, which is just being invented by gamblers.
The probability theory is invented by gamblers who have weirdly for the first time, even though people have been gambling for thousands of years, doing the math about gambling to figure out odds. John Law does the math and gets rich as a gambler, step one. Step two, he travels around Europe and sees all of these threads of proto-capitalism that I was talking about. He’s in Amsterdam and he sees the Joint Stock Company and the Dutch East India Company, which is making Amsterdam rich. He’s in England and he sees paper money and the Bank of England. He realizes that this is a moment when you can take all of these things. He would be like an entrepreneur today. I feel like he would be like a Silicon Valley start-up guy today. He picks all of these different things that really are like financial technologies, and has this vision which is, I could put them all together and build a whole modern economy like none that has ever existed. He starts pitching these ideas like the way today you would pitch. He’s going around and pitching dukes and princes and whatever, whoever will listen to him. He finally finds a taker in France. Aware that King Louis is a young boy and France was being ruled by a reagent, who’s the Duke of Orleans. The Duke, like John Law, is both smart and loves to party, loves to drink, has a chemistry lab and also hangs out with opera singers and whatever, sounds fun.
Hall: This is a typical renaissance nobility party Duke.
Goldstein: Yeah, Duke of French, right?
Goldstein: That seems interesting.
Hall: Pretty amazing.
Goldstein: Go to dinner there, yeah. The Duke likes John Law. John Law is very charming and very smart. The Duke just lets John Law set up shop in France, so John Law creates the first modern bank in France and first paper money in France, and gets control of France’s territories in North America. This is a pre-Louisiana purchase. You remember the Louisiana purchase? France controls the whole middle chunk of North America all along the Mississippi river. John Law names the town, the settlement at the mouth of the Mississippi river for his patron, the Duke of Orlean, New Orleans. Fun. France has been basically bankrupt at this point. France had been fighting endless wars as they did, and the previous king had, at one point, melted down all his silver to make more coins. The country is in bad shape. John Law, by doing all this work, actually makes the economy start to boom. Finance can be useful, especially if you haven’t had it, and nobody can borrow money and there is no money. He’s printing this paper money and trade is increasing like we were talking about. Things are going great. So far, so good. Then he starts selling stock in this trading company that has the monopoly rights to French Louisiana, a big chunk of North America. People were like, “Oh well, the Dutch got rich from the Dutch East India Company.” They saw how Spain got rich from their holdings in South America, basically. Everybody starts buying stock in the Mississippi Company, they call it, and the price of the stock starts going up.
Now, you’re asking about a bubble. The bubble is coming. The price of the stock starts going up and up. Everybody’s getting rich and people are coming to Paris to trade stock. They actually have to close off a street because it’s so full of people trading the stock. They invent the word millionaire, fun detail. Because everybody’s getting so rich, they need a new word for it. What are we going to call these people with millions of whatever? What were they? Louis […] maybe, I forgot what the unit of account was. Then it starts to get a little out of hand. John Law is printing more and more paper money that people are using to buy the stock. Now, in the same way that France before John Law had too little finance there, it has too much finance, too much money, too much of the economy is getting swallowed into John Law’s system. Ultimately, the bubble burst. I mean, for a minute, John Law tries to make paper money not redeemable for silver and gold but another moment of an effort, fiat currency. It doesn’t work. He gets chased out of France by a mob and the whole French economy collapses. The French, like the Chinese, had bail on paper money for a while. John Law lives out the rest of his days in Venice. The British, they had their own bubble at the same time, but they didn’t get screwed and they end up doing better. People talk about the Napoleonic Wars and Britain’s victory in the Napoleonic Wars, having some amount of roots back in this Mississippi bubble. That’s pushing it. I’m not going to endorse that argument, but it’s fun to think about it.
Hall: I don’t want to steal your conclusions from the book.
Goldstein: Please. [laughs]
Hall: The finding that you reach at the end of that is a little different than I think a lot of the general ideas of how responsible John Law was for what ultimately happened that burst this bubble. But there’s an interesting term here that you bring up in that chapter, talking about the real economy. I think this is really interesting because to me, it ties back to the conversation you have with your […] about where did the money go. I’d like to hear your thoughts on that.
Goldstein: Yeah, I like that connection. I haven’t thought of that before, but you’re absolutely right. The real economy, this is just a piece of jargon that economists today use, when they are talking about not finance essentially, the real economy is the economy that has nothing to do with banks or stocks or bonds. If you have a job that is not in finance, you work in the real economy. As I put it, I think, in the book, the carpenter who builds the house, the contractor who builds the house works in the real economy. The mortgage broker who gets you the loan does not work in the real economy. They work in finance. When things are working well, finance makes the real economy work better. You can have an economy where there’s not enough finance, where people who are hard-working have plenty of money, could afford to buy a house if they could get a loan, can’t get a loan. That world exists. Even today in a lot of the developing world, they are undercapitalized. They don’t have well-developed financial systems. That’s a problem. More finance is helpful in that universe. It helps the real economy.
Conversely, you can also have too much finance. You can have finance get out ahead of the real economy, which is what we see in a bubble. It’s certainly what we saw in the Mississippi bubble. That’s what we saw in the United States and Europe, to a lesser extent, in the early part of the 20th century. The 2008 financial crisis followed this over-financialization, like, finance got out ahead of the real economy. You would need to have a balance. One of the things that’s striking to me about John Law is more about a balance of power, really. There’s this idea that actually one of the dukes who was watching this whole thing in France said was, “You can’t have good finance in an absolute monarchy. Maybe it would work in a place where power was more divided.” As it happened in England, by this point, a parliament had more power relative to the king. It wasn’t such an absolute monarchy anymore. There is a reasonable argument that that made it more stable. It basically made finance more stable in England. It made it easier for the king to borrow, because there was more credibility that people would force them to pay back. I mean, to me, what’s interesting about that John Law story, it’s not that John Law was a conman.
To your earlier point, I think John Law believed in his system. I think he really believed in it. He wrote these fairly technical books about why it made sense and they’re compelling books. The problem maybe was that he had too much power that he could just keep printing money, and selling more shares, and doing whatever he wanted, and there was no check on him. When I hear people today arguing in the United States about how much regulation there should be in banks and how much they should be able to do what they want, and various tensions between regulators and the players in the financial system and everybody else, those arguments are good. Wherever we should move or whenever the fact that different groups of people have power and are pushing and pulling against each other, it reduces the risk of crisis, basically. Obviously, it doesn’t reduce them to zero. We will still have crises, but I think we’ll have fewer.
Hall: The tensions may be a signal that the system is functioning properly.
Goldstein: Yes, at least they increased the chances of it.
Goldstein: You can have the tensions and still have failures, but I think failures become less likely and maybe less frequent.
Sciple: So, you talk about these issues about money printing and the importance of conditions in the economy to how money develops, and we also talk about bubbles, which I think is a natural transition to what’s going on with maybe bitcoin right now. Different people might say it’s a bubble, different people might say, “Hey, it’s headed to $ 1 million,” but I think it definitely reflects some attitudes around the financial system today and maybe where money is headed in the future. Where do you see bitcoin and cryptocurrency as a genre fitting into financials?
Goldstein: I mean, bitcoin is still super interesting to me. The part that I talk about the most in the book is the origin story of bitcoin. Again, to the earlier point, a very useful way for me to understand things and to explain them is to tell the story of how they came to be, because there’s a narrative and there’s ideas and it goes back to the 1980s, which is a long time ago now, when this guy, this cryptographer, this expert in codes at Berkeley, named David Chaum, wrote this paper, the subtitle of which was a transaction system to make big brother obsolete. It’s this incredibly prescient semi-technical paper where he basically sees that we are heading into what I think he calls a dossier society. Again, this is when Mark Zuckerberg is a baby or something. He’s writing this and he’s like, “Look, computers are going to be everywhere. Everything we do is going to be tracked. Every purchase we make is going to be tracked. What we need is something that has the anonymity of cash, of paper money, but that can exist in the digital world.” He comes up with an idea for how to do it.
In his idea, there’s a bank or something like a bank. There is a trusted intermediary. He basically invents a digital cash, but that requires a trusted intermediary. Then this group of intellectuals, coders, techno libertarians largely based in Silicon Valley, finds his work and they decide that they want to push it further. They want to have digital anonymous currency that doesn’t even require a trusted intermediary, that doesn’t even require a bank. That is a technically hard problem to solve. But over about, I don’t know, 15 years or so in the ’90s into the early aughts, they’re working on it and they’re solving one technical problem after another. Then finally in 2008, there’s this series of these attempts, these different kinds of proto cryptocurrencies. Then finally in 2008, you get the Bitcoin whitepaper, which happens to land right at exactly the same time as the financial crisis is happening, which is perfect, because to go back to the theme of trust that you guys were talking about, it’s a moment when people are losing trust in banks and in money and in governments. Here is this very technologically elegant system that promises money without governments or banks, where you don’t have to trust any institutions, you just have to trust the code. But then, what happened then, here comes the revolution. But that was 2008. That’s a long time ago. On the one hand, people are willing to trade lots of dollars for Bitcoin right now. On the other hand, Bitcoin clearly has not taken over the world, it’s not what people use to buy stuff. That pair of facts is really striking to me and I don’t quite know what to do with it.
Sciple: Maybe along the lines that earlier asked where does money come from? I’d asked you, what is bitcoin? Do you see it as a currency or is it money or what is it?
Goldstein: It could be money. It’s set up in such a way that if a bunch of people wanted it to be money, it could work. Although there is a lot of friction still that the transaction costs seem pretty high right now. It can’t handle that many transactions per second. I know people have been trying to solve those problems. But I don’t want to be overly binary about money. It’s nice to think of things as on a spectrum more or less like money. But if you really made me say it is money, yes or no, I would say no, or not yet, just because I never bought anything with it, I don’t know anybody who’s ever bought anything with it. Most places I shop, you can’t buy with it. The simple idea. We can talk about other definitions, but I don’t think it’s money.
Hall: A couple things that I think about when I think about bitcoin. You talked about how the United States, almost a century ago, essentially came off the gold standard. One of the reasons, and you talk about this in the book, one of the problems with the gold standard is it so fixes your supply. How was this hard transition for society to go through, did the value of money change or did the price of the goods change? [laughs] That tension, that transition into something like bitcoin, you recreate the same problem, it seems to me. I’d just be curious to hear your thoughts on that versus when you think about fiat money, that it can address some of those issues. When it comes to trust, what’s the interrelation?
Goldstein: Bitcoin was developed to be finite, which at some margin, that’s important for money if you can have it be infinite, but there is a finite bitcoin that will ever be created, period, full stop. In that way, it is clearly modeled on gold. One of the early, the other cryptocurrencies I think was called bit gold or something like that, which some people like, they like thinking of money as gold, economists almost to a person think that’s a bad idea. What happens when you have a fixed amount of money and a growing economy is you get deflation, you get falling prices. We live in this basically low inflation world now, sometimes it gets higher, for a while it’s been quite low. We’re not used to thinking about deflation, but deflation was a key driver of the Great Depression. It was a key element of the gold standard, no pun intended. There are a number of problems with deflation.
The key problem, well, if you have debts, what happens in deflation is prices fall and wages fall. They tend to rise and fall together, but your debts don’t fall typically. If you had to work, whatever, a week, a month to pay off your mortgage, but you have deflation, then now you have to work longer to pay off the same mortgage. The problem in the depression is prices are falling because the gold standard is deflationary basically. People are defaulting on their loans and then banks are going under and more people are getting laid off and you’re in this deflationary spiral. We can break that with fiat money in a way that you can’t break it on a gold standard with bitcoin. Or put in another way, when the price of bitcoin doubles, that’s the same as the price of everything falling in half. If we were really living in the bitcoin world now, you would have to work twice as long at $ 3,000 per bitcoin to pay off your mortgage or your student loans as you had to work at $ 17,000 per bitcoin. That’s not going to work. You can’t have a currency that’s that volatile if you actually want to use it to buy and sell stuff.
Sciple: Yes. We talk about the challenges of bitcoin as a currency, obviously getting a lot of attention right now with all the [laughs] craziness going on in the market. Should the average person be paying attention to what’s going on with bitcoin?
Goldstein: None, unless it seems interesting to them. Bitcoin is intellectually interesting to me and I’m open to various use cases. There’s oligopoly on credit cards. It costs too much money. The processing fees on credit cards are arguably too high. People arguably pay too much money when they send money overseas. Remittances is this huge global business controlled by a few players. It costs a lot in fees. If people can use bitcoin or blockchain technology more generally to make transactions cheaper, that’s great. That’s a productivity gain. That’s the pie getting bigger and everybody getting richer. I’m open to that, I’m ready to see that. I’m just not aware of it really flowering in that way. I feel like it hasn’t really delivered on its promise yet.
Hall: You ‘ve talked a fair bit about bitcoin, cryptocurrency. I think that’s one area where folks are trying to project out, what is the future lookout for money? What are your biggest questions about what the future is for money going forward today?
Goldstein: It seems like a lot of the real action with money happens when there are financial crises. The book has made me very wary of predicting anything. I was never that into predicting and I’m less into predicting out, because you just see it again and again, smart people, not only do they not predict the future, they don’t even understand what’s going on in the present. You look at the depression and nobody knows really that it’s the gold standard and really smart people are like, “Whatever you do, don’t go off the gold standard.” Pretty clearly, they were wrong and going off the gold standard was a great move. Those people then were smarter and better informed than I am. I don’t know. There’s a really nerdy thing that’s interesting to me that’s going on now, and that is the persistence of low inflation and low interest rates. I feel like that’s one of those weird, hugely important behind the curtain gears of how the world works. If you go back, say a year, basically, go back to right before the pandemic hit the U.S., we had very large deficits, we had significant tax cuts without spending cuts, we had very low unemployment, below 4%, and we also had very, very low inflation and interest rates. You shouldn’t have all of those things [laughs] at the same time. If you have 3.8% employment and giant budget deficits, people should be afraid of inflation. The interest rates on government bonds should be going up.
Inflation itself, you would think would be going up, and it wasn’t happening, and it hadn’t happened for years. It’s really a mystery. Why? It’s usually important the fact that the government was able to borrow trillions of extra dollars in the past year and that nobody even really argued about it that much. There was like, “Yeah, sure, let’s get another trillion out.” That was a good thing. It meant many thousands of dollars for tens of millions of people who lost their jobs and got extra unemployment, maybe the most important piece of that. It was enabled in large part by these persistently low interest rates and persistently low inflation. There are various stories for why it’s happening, but I don’t think it’s really sunk in how big of a deal that is. Is it permanent? Probably not permanent, but how long is it going to last? The interest rates go back up, that’ll be a big problem. I think that is maybe an underappreciated monetary reality we’re living in. Also the Fed created trillions more dollars. Also, it should be inflationary and was not.
Sciple: Jason talked earlier about the cost of light and you could look at the money printed and there’s a similar chart when it comes to breaking maxis. For version two of this book, maybe you can throw that one in there.
Goldstein: Yes. It’s extraordinary, and like I said, you can tell stories about why, but clearly, what economists thought 10 years ago was not right. The world is much different than people thought, which is exciting.
Sciple: That’s the big macro question about the future of money. I wanted to zoom in a little bit more micro, and you talk about the stories of people at what’s going on in finance. What is something that you do differently financially today in your personal financial life that’s a result of things you’ve either learned on the podcast or through your work on this book?
Goldstein: I’m pretty into indexing. We did a story on John Bogle several years ago. I don’t know if you guys covered or remember, this hedge fund manager made a bet with Warren Buffett.
Sciple: Warren Buffett, yeah.
Goldstein: Where Buffett said, “You can’t pick hedge funds that’ll beat the S&P over 10 years.” The hedge fund manager who ran a fund to funds whose job was picking hedge funds basically said, “Yes, I can.” Buffett won and the hedge fund manager lost. We did a story about that. We went to talk to John Bogle who founded Vanguard, invented index funds. I really believe in indexing, although I will say the crazy run-up in tech stocks has made me question that a little bit. [laughs] But I don’t believe markets are perfectly efficient and you can talk about what that means. But I really believe in indexing; simple, boring answer.
Hall: We don’t feel bad about that at all. We think if you’re someone who isn’t trying to pay super close attention and look for individual stocks to pick and monetary portfolio on a day-to-day basis and just wants to take advantage of this growth that we have in the economy that you talked about earlier, that it’s made possible by the American financial system, I think index funds are a great way to capture that and sleep comfortably at night and know that you’re going to get those rewards.
Goldstein: Well, so much of it is behavioral too. Because I put somebody now in a target date fund, which is even more indexed, you don’t even have to decide when to rebalance. I have a very small amount of money, one percent of my investable assets that I make stupid bets with. I know they’re stupid when I’m making them. They’re not crazy, they’re just bets and I’m obviously the dumb money. If you think about payment for order flow if you have a retail trading account, the reason your trades are so cheap is because other people pay to be on the other side of your trades. Think about what that means. That means you are the dumb money. You’re such a bad trader that people will pay to bet against you. Whatever bet you’re going to make, they are like, “I’ll take the other side of that guy, whatever he’s trading,” that’s us. That’s what we’re thinking about.
Hall: Well, Jacob, thank you for giving back. I’m sure there are lots of people that appreciate your contributions to their welfare. It’s a great way to go.
Sciple: Jason, any last questions before we hit the road?
Hall: I think this might be really, really interesting to hear. What’s your biggest question about the future of money?
Goldstein: If you remember this, after the financial crisis, I guess politicians have to say this. Politicians, they pass Dodd-Frank, whatever reform acting like, “This will never happen again.” I hope they know better than that. There will definitely be another financial crisis because there’s always another financial crisis. It is not because people are greedy or bad, but just because the nature of finance is that at least a crisis, that’s just what happens. I’m curious where the next financial crisis will be and what it will mean, because those are the real — the book is largely like, it’s another crisis and here’s what we learned and how money changed it, here’s another crisis and here’s another crisis. I don’t want it to happen. I hope it doesn’t happen for a long time. I don’t know where it will be. You can look at debt and especially runnable debt when people are taking money that they promised to give back to people at a moment’s notice and turning around and then lending it out long term, doing maturity transformation. That’s a good place to look for a crisis, because that’s crisis prone. But people doing it in weird ways that nobody really thinks about, that’s a big question to me and I’m curious where it’ll be in the world, where it’ll be in the financial system, how money will change because it’ll happen, we just don’t know where or when.
Sciple: What will we pay attention to? I’m sure you all are covering it on Planet Money. I hope we can have you back on the podcast sometime in the future to talk about it. I want to remind everybody, the name of the book is Money: The True Story of a Made-Up Thing. Jacob, can you let everybody know where they can go find the book? Where they can find your work if they want to keep up with you? Where are you working on these days?
Goldstein: You can find the book anywhere you buy books. Go into any bookstore or go on the Internet to a giant or small bookseller and they should have my book, Money: The True Story of a Made-Up Thing. Truly, what I’m working on right now is actually a story and that thing we were talking about and the disappearance of inflation and interest rates. I’m trying to make it into a story. The struggle on that one is getting from topic to story. But there’s this great story from, remember, James Carville worked in the Clinton administration. The reeducation, very good. It’s always got his LSU paraphernalia when he’s on TV now. That was the story when the government really was checked by interest rates. They talked about the bond vigilantes and the Clinton administration wanted to do all these things. Treasury rates went up to 8%, they’re 1% today. Carville had this thing where he’s like, “I used to think that if there was reincarnation, I’d want to come back as the president or the pope or a 400-hitter, but now I think I want to come back as the bond market. Because if you’re in the bond market, you can intimidate everybody.” I’m hoping that maybe that’s the beginning of the story, but yes, so that’s what I’m working on. You heard it here first.
Sciple: I love it. Well, thank you, Jacob. I will be staying tuned in for whatever comes down the pike.
Goldstein: Thanks so much.
Sciple: As always, people on the program may own companies discussed on the show and The Motley Fool may have formal recommendations for or against the stocks discussed, so don’t buy or sell anything based solely on what you hear. Thanks to Heather Horton for mixing the show, for Jacob Goldstein and Jason Hall, I’m Nick Sciple. Thanks for listening and Fool on!