I recently finished Money: The True Story of a Made-Up Thing by Jacob Goldstein, co-host of NPR’s Planet Money podcast. As with Planet Money, the book has something of value for people well-versed in economic history/know-how as well as those completely new to anything economics. The book also shares Planet Money’s uncanny ability to use (often quirky) stories to make a point. I found Money to be a short, digestible, and – given its length – surprisingly comprehensive look at the history behind society’s evolving definition of, use of, and attempts to reign in the power of money.

The biggest takeaway for a reader of any background is found in the book’s conclusion: “…the reminder that there’s nothing natural or inevitable about the way money works now. We know money will be very different in the future; we just don’t know what kind of different it will be.” We all have so intensely internalized what “money” looks like, what it can and cannot be, what government actions will cause inflation, that even people swimming daily in finance and economics forget how malleable the nature of “money” has been.

This valuable lesson comes from the book’s rich history of what societies have used for money and how they’ve dealt with certain difficulties along the way. The barter economy Adam Smith described in Wealth of Nations, the book points out, never really existed. People always exchanged their stuff for what they wanted from other people. There wasn’t any currency as we think of it at first, but there was reciprocal gift-giving. “A power move, like insisting on paying the check at a restaurant,” as Goldstein puts it.

I found it notable that, despite not having the bustling marketplaces we see today everywhere in the world, it was still commerce that brought the earliest communities together: The Greek agora was meant to act as a meeting place for civic discussion, with a sideshow for a place to allow people to exchange their wares. “In the long run, shopping won out over public discourse.” I’ve always thought people underestimate the power of commerce to bring communities together, and this seems to be an illustration of that power. (Sadly perhaps, people have shown themselves to be much more interested in going to the farmer’s market than town hall meetings.)

For as long as groups have declared power over others, they have collected taxes. But without a standard representation of value like money, cloth and grain acted as something the government in China could collect around the 11th century. So everyone had the annoyingly inefficient responsibility to weave or grow to some extent just to pay taxes. The arrival of coin currency from invading Mongols allowed Chinese people to specialize in their crafts and manage to pay taxes by focusing their time on what they did best. This allowed China to flourish centuries before the future economic powerhouses of Europe.

But the man who drove out the Mongols and eventually founded what became the Ming Dynasty wanted to Make China Great Again, and that involved getting rid of the “money” system that had allowed China to be the world’s most advanced nation by the late 14th century. Soon China went back to the cloth-and-grain system and regressed tremendously. The removal of money from China is not exactly the entire story here, but the book shows an interesting experiment about the economic impacts of introducing and then removing money.

The great lesson from this time is that China had, for centuries, thrived under a system where money was not tied to anything like a precious commodity. Money was worth something because everyone else just believed it was worth something. And this is essentially what defines our monetary system today. The dollar cannot be eaten or boiled down into jewelry. Short of the government accepting it as payment for taxes, it doesn’t have any value if everyone decided one day that it no longer had value.

But historically the idea that money was tied to nothing but the government’s enforcement (sometimes by death) of its value typically didn’t sit well with people. Linking currencies to gold or silver was thought to establish credibility, and somewhat limit the ability of warmongering sovereigns to inflate their way out of any problem. (Of course even under such regimes, people would fudge the weight of their coins, and sovereigns often spent their way to fiscal ruin.) The United States dollar was no exception. The convertibility rate of the dollar to gold was essentially fixed, giving predictability to the international financial system and confidence to the users of dollars.

Fast forward to the late 1920s. A banking ‘panic’ – where people all at one time were worried their banks would fail and their deposits would be wiped out – started as any of them did around then. People decided they’d convert all of their dollar deposits into gold. This was before the FDIC insured bank deposits, so people thought the safest place for their savings was out of the bank and into gold. But banks only have so much gold, and as the gold supply dwindled, it created a vicious feedback loop where people’s fear created a run on the bank’s gold deposits.

The Federal Reserve – only created recently in an effort to smooth over panics and financial crises like this – decided to raise interest rates. This was what the playbook said for countries who were using the gold standard. Raising interest rates was as a way to incentivize people to keep their money in banks and prevent the impending bank runs that would cause a financial crisis. The higher rates meant depositors would get higher returns. But raising interest rates also means investment becomes more difficult. And when there’s a contraction of the money supply, economic activity shrinks.

And this, dear readers, is how the Federal Reserve made an otherwise garden variety recession into the Great Depression. FDR, against all the doomsday prediction of his advisors, took the dollar off of gold. It allowed for a speeder recovery and showed, yet again, that our assumption of what money needs to be can cause us to be quite dogmatic about what will happen when the nature of it is changed. FDR, according to Goldstein, stopped the bank runs with his comforting fireside chats. Indeed, when it came to bank runs, it really was that the only fear we have is fear itself. Once everyone thought banks weren’t at risk, they stopped pulling out their money and it became a self-fulfilling prophecy. Yet again, the shared trust in the credibility of the dollar and banks was what gave the system its value.

The history of central banks has shown societies’ delicate experiments with how to best prevent financial crises and the United States is no exception. Alexander Hamilton pushed for a “national bank’ at the country’s outset. Populist Andrew Jackson thought that banks and the coastal elites that ran them had too much control over the inland farmers and countrymen he was claiming to represent. So he got rid of the national bank.

What dominated for decades was a period of ‘free banking’ where any bank could print their own currency. At one point, there were 8,370 different kinds in circulation. A helpful reference book would tell merchants the value of each bank’s bill and, in an effort to prevent counterfeiting, the appearance of each bank’s currencies. It sounds like total chaos, and in some ways it was. The system led to financial panics every decade or so and the US went back to a national bank called the Federal Reserve in the early 20th century for good reason.

But the frictions in the system weren’t as catastrophic as you might think. As Goldstein says, “Travelers typically lost around 1 or 2 percent when they exchanged paper money, in the same ballpark as the fee I pay today when I can’t get to my bank and have to use another bank’s ATM.” Also, perhaps surprisingly, there weren’t all that many totally fraudulent banks. Today, imagining 8,000 different corporations printing their own Monopoly money sounds insane. But it worked better than you’d think!

Today, the Federal Reserve is run by 12 regional banks and it sets short run interest rates on the open market by selling treasury bonds. That might sound like a lot of confusing word soup to someone not totally in the mix of finance and economics. But just know that what the Federal Reserve does today is a little different than what it did pre-Financial Crisis, more transparent than what it did before the 1980s, and much different than what it did when the dollar was still chained to gold before the 1930s.

There is an important distinction between “money” and “currency.” Currency is the coins and bills we can hold in our hands. But money can be numbers on a screen and what banks do. Put another way, there is a concrete tangible amount of currency, but the amount of money in the system is always changing. One of my dollars deposited in a bank can be lent out to someone looking to start a business. That businessperson take the dollar and pays a construction worker to build an office. I still have a dollar, the investor has a dollar, and the construction worker will do something with that dollar. This “money multiplier” is what causes economic activity to thrive, and is in part what stopped China from reaching its full potential during the Ming Dynasty. But this distinction, or at least the ability to have the distinction, is pretty counter-intuitive and seemed primed for disaster for most of history.

Even our definition of a “bank” should be flexible. Today, as with most of history, a bank does two things: takes in and holds people’s money; and lends out money. Why do banks need to do both roles? Money shows a scenario where some institutions are essentially ‘money warehouses’ that store your money, while others are the ones that take risks and lend to borrowers using the money of investors. The mismatch between people wanting to safely deposit their money and the risks banks take is essentially where many frictions in the financial industry lie.

The arrival of cryptocurrencies has shown potential disruption to the idea that only the Federal government can control currency. If our dollar bills have value only because everyone else agrees they do, why would numbers on a ledger be any different? So far, the issue is that the fluctuating value of Bitcoin makes it hard to be used as a ‘storage of value.’ I’ll admit that Bitcoin has been around much longer than I predicted, but it still has too many of the problems of historic attempts at money. Blockchain technology and cryptocurrencies may have some value for society in the future, even it currently looks unlikely to replace the fiat money system we have now. If there’s one lesson about monetary history and Money, it’s that you should never count out changes that at first glance look pretty absurd.

Money has been printed by governments and it’s been printed by private banks. It’s been backed by precious commodities like gold and silver and it’s been backed by nothing. It’s been represented as coin and bills and it’s been represented merely as numbers on a screen. Its confusing nature has caused financial panics even when there was nothing wrong. Our relationship, control, and treatment with the concept of money will continue to change. A book like Money shows us how we should learn to accept and accommodate that inevitable change.

What follows is the fourth installment in a series explaining the context and deeper meaning of all eight songs on my band’s album all about Adam Smith “Silent Revolution.”  Listen to the entire album with audio commentary/explanation here. This song is inspired by text found in Part 1, Chapter 2 of Wealth of Nations.

The book commonly referred to as “Wealth of Nations” is actually an abbreviation of its full-length title “An Enquiry into the Nature and Causes of the Wealth of Nations.” The question at this time was why, amidst millennia of abject poverty and subsistence-level living, a few countries mostly in the northwest of Europe had started to have a significantly better standard of living. For some, the answer was obvious: the farther from the equator you were, and the whiter your skin was, the more superior you were. For others, it was a country’s ability to hoard gold or other fine metals. Or maybe it was that good-ol’ Protestant work ethic? Smith rejected all of these explanations and instead used Wealth of Nations to argue that a nation’s standard of living is determined by its ability to utilize specialization and the division of labor.

Smith went farther than just rejecting the racial explanation as a determinant of wealth. He saw all humans as essentially equal in worth and dignity. What we perceive to be inequalities is actually the result of, and not the cause of, the division of labor.

The difference of natural talents in different men, is, in reality, much less than we are aware of; and the very different genius which appears to distinguish men of different professions, when grown up to maturity, is not upon many occasions so much the cause, as the effect of the division of labor. The difference between the most dissimilar characters, between a philosopher and a common street porter, for example, seems to arise not so much from nature, as from habit, custom, and education. When they came in to the world, and for the first six or eight years of their existence, they were, perhaps, very much alike, and neither their parents nor play-fellows could perceive any remarkable difference.

Smith uses the comparison of a street porter and a philosopher as extremes of social standing. One is near the lowest status of society as far as prestige and perceived skill level, the other considered to be a wise and distinguished profession. But before they enter into schools or the labor force, their skills are basically equivalent. Through different levels of education, parenting, and circumstance, these previously-indistinguishable individuals end up working two jobs with incredibly different reputations in society. Yet deep down the two people are not so different.

By nature a philosopher is not in genius and disposition half so different from a street porter.

This is a radical contrast to any “nature” arguments in a “nature versus nurture” debate. This specifically departs from Aristotilean thinking that certain people like the Barbarians were meant to be slaves (thus explains our lyric “so Aristotle was wrong about the slaves”). The commercial economy, in addition to giving us the capability to innovate and flourish, also gives us deep material inequality that deceives us into thinking we are less equal in worth or dignity than we actually are.

It is the necessary, though very slow and gradual, consequence of a certain propensity in human nature…the propensity to truck, barter, and exchange one thing for another.

Just as with Smith’s conception of sympathetic fellow-feeling, this propensity to engage in commerce is universal across people. In fact, it is what separates us from other animals. Unlike dogs, for example, humans are able to engage in trade and specialize.

It is common to all men, and to be found in no other race of animals, which seem to know neither this nor any species of contracts…The strength of the mastiff is not in the least supported either by the swiftness of the greyhound, or by the sagacity of the spaniel, or by the docility of the shepherd’s dog.

So the next time you go down to your corner store to buy a pack of gum or toothpaste, think to yourself, “damn, it feels good to be human.”

The complete lyrics to “The Street Porter & the Philosopher“:

Well at six years old we seem to be
In ability nearly the same soon changed by modernity
And our innate desire to truck barter or exchange
And you’re not any higher in worth or dignity

Whether you’re paid to think or move on street
Your disposition and genius were made in equity
In isolation they’d appear the same
Still that philosopher remains so vain

But the fellow dogs separately
Can’t utilize their different skills: strength, swiftness or docility
From no innate desire to truck barter or exchange
And you’re not any higher in worth or dignity

Whether you’re paid to think or move on street
Your disposition and genius were made in equity
In isolation they’d appear the same
Still that philosopher remains so vain

It’s our innate desire to truck barter or exchange
And you’re not any higher in worth or dignity

 

I have written a concept album with a band called The Benevolent Dictators all about Adam Smith, and the first song was just released.

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My motivations for writing the album and general vibe will be left for another time, but I feel inclined to discuss more about this particular song’s thematic significance. The song is inspired by text from The Wealth of Nations, Book 3, Chapters 2-4. The summary: commerce liberated the masses from the feudal system.

[Adam Smith was an 18th century Scotsman. His first book, Theory of Moral Sentiments, is about morality and human nature. His second book, Wealth of Nations, is considered the starting point for modern economic thought.]

The story begins just after the Roman Empire’s demise. Everything is in chaos and eventually order is restored via different sovereign monarchs throughout the former Empire. The monarchs don’t have the capability to enforce laws and protect everyone in their respective polities, so they enlist the help of others in exchange for big chunks of land. These estates produce enough food for the feudal landlords to survive. But, Smith observes, our desire for food is limited to the extent our bellies can make space. To utilize the surplus food, the feudal lords give their additional food to individuals in exchange for their servitude in the feudal estate. At the time, the feudal lords had no other outlets for their surplus food. Thus, their best option was to increase their power by making commoners dependent on them for food.

Meanwhile, a bunch of city dwellers (called “Burghers”) were given a special exemption by the king to start making stuff. These are the artisans and merchants. Soon, the Burghers had shiny baubles and trinkets that they were looking to sell. The feudal landlords might have limits for their desire to fill their bellies, but they have no boundaries on their childish vanity. The feudal lords wanted to show off how great they were and get their hands on these diamond trinkets. As a result, they started to trade their surplus food not for the servitude of commoners, but for the luxury goods the merchants were selling.

What they used to exchange for the servitude of hundreds, sometimes thousands of men, was now going to service their childish vanity. As the demand for these trinkets went up, so did the supply, so the previously dependent commoners now could join in on the market. Before, when the commoners were given subsistence-level resources in exchange for their work, there was of course no incentive to innovate or increase efficiency. They did the bare minimum that allowed them to survive, because any extra work would go unrewarded. Now, they began to cultivate different areas, knowing the fruits of their labor would mean more money for themselves. Prosperity follows.

In addition to the cultivation, this new market brought about interdependence where dependence used to be. In a sense, all of the parties involved were just as reliant on each other as before. The commoners of course needed the landlords as consumers of their goods, and the landlords needed an outlet for their surplus food. The difference now was that the power was completely decentralized. Rather than a commoner being subjected to the whims of one feudal lord, the market gave him the ability to appeal to the childish vanity of all the landlords to which he could ship his goods.

What is more exciting than reading about how peaceful commercial exchange liberated the masses from the tyranny of the feudal system? Smith emphasizes how this ‘silent revolution’ came about not because a top-down authority dictated it, and not because anyone was consciously trying to bring about positive change for the masses.

A revolution of the greatest importance to the public happiness was in this manner brought about by two different orders of people who had not the least intention to serve the public. To gratify the most childish vanity was the sole motive of the great proprietors. The merchants and artificers, much less ridiculous, acted merely from a view to their own interest, and in pursuit of their own pedlar principle of turning a penny wherever a penny was to be got. Neither of them had either knowledge or foresight of that great revolution which the folly of the one, and the industry of the other, was gradually bringing about.

There are free PDFs all around the internet if you’d like to read the passages in their entirety. Here is one.

I leave you with the lyrics of Silent Revolution:

They say beauty is in order
What’s left over in so few hands
But the landlords spell their doom
Wanting the jewelry the merchants have

The price they paid could buy them
A thousand different men
And though they get the diamond
Power leaves them
And commerce wins instead

Here comes the silent revolution
Moving slowly, no certainty
Interdependence, cultivation
From no design comes prosperity

Without any intention
Without beneficence
The feudal system’s dying
Lords made obsolete from
Their childish vanity

Without any intention
Without beneficence
The feudal system’s dying
Lords made obsolete from
Their childish vanity