Episode 160 – Money: The True Story of a Made-Up Thing By Jacob Goldstein

In this episode of The Agent of Wealth Podcast, the Bautis Financial team discusses the tenth book assignment in their monthly Book Club, Money: The True Story of a Made-Up Thing by Jacob Goldstein. ​​In Money, Jacob Goldstein shows how money is a useful fiction that has shaped societies for thousands of years, from the rise of coins in ancient Greece to the first stock market in Amsterdam to the emergence of shadow banking in the 21st century.

In this episode, we discuss:

• ​​The history and evolution of money.
• The concept of value and how money derives its worth.
• The power and influence of money.
• Technology and the future of money.
• And more!

Resources:

Money: The True Story of a Made-Up Thing | Listen to Previous Episodes of the Bautis Financial Book Club | Bautis Financial: 7 N Mountain Ave Montclair, New Jersey 07042 (862) 205-5000 | Schedule an Introductory Call

Marc: Welcome back to The Agent of Wealth Podcast, this is your host Marc Bautis. On today’s show, I’m joined by the Bautis Financial Team – John, Kayla and Kyra – for another episode of our Bautis Financial Book Club.

This is the tenth episode of the Book Club series, and this time around, Kayla selected the book Money: The True Story of a Made-Up Thing by Jacob Goldstein. Kayla, what drew you to this book?

Kayla: I thought it would be an interesting book topic, considering the recent bank crisis – with Silicon Valley and First Republic – and also the debt ceiling talks. The idea that we ran up the debt to trillions of dollars is crazy to even think about because we don’t even know how to visualize that and what does it mean. And I thought this book was a fun history that goes all the way back to Mesopotamia, how money started, but then it transitions into where we’re going with how the rise of cryptocurrency and stuff. I thought it was just a fun way to get the history of money.

Just a quick summary of the book: We’re going to go into the history of money over hundreds and thousands of years, how that’s come about. John’s going to talk about how money derives its worth and how we as a society value currency. And then Kira is going to talk about the power that money plays in our society. And then we’re going to talk about the future of currency. Marc, I’m going to pass it back to you to talk about the history of money.

The History and Evolution of Money

Marc: Okay, yeah. I guess if you look at our ability to do everything digitally, exchanging money, you press buttons on the phone, and you look at where it started, that journey is fascinating. So people in pre-money societies, they were pretty self-sufficient. You had the Incas who they created a civilization without money. The government told everyone what to grow, hunt, and then they took out what everyone made, and then they redistributed it. In other societies, or these are most of the societies, everything revolved around barter. You have something that I want, I have something you want, and we would exchange it; exchange goods, exchange services, whatever it was. But this was kind of tough because it required that double coincidence; both people had to have what the other one was offering.

So money initially was created to solve the problem of barter. And it started with coins in Greece. And it was kind of interesting, the value of the coins, it was based on the value of the metal used to make up the coins. And then what transpired after that, merchants would give traders paper receipts instead of bronze coins. No one actually wanted to carry or lug around all these coins. So then people started trading paper receipts. This paper receipts were a hit ’cause, like I said, you didn’t have to lug around the coins.

And a lot of this started in China before the European Industrial Revolution. And it really was the shift from a futile economy to a market economy. And some prominent historical figures were involved in the history of money. You had Genghis Khan in China who said, “No one’s using bronze coins. You can only use paper money.” And his idea, he’d like to print it, was appealing so that he could invade Japan with it. And then after that failed, they wound up printing a different type of money.

Then there was Marco Polo who he noticed, and he said, “Well, money’s backed by nothing.” People figured out that paper money only worked because everyone agreed that paper could be money. Then in England they started to cheat, and they would lessen the amount of metal in their coins, and then people became skeptical of how much metal was really in them, what do these things work? And sort of like what you see now of people becoming skeptical of the banks and the money system.

But what happened in England was people would take their gold, they would bring them to goldsmiths, and Goldsmiths would give them, again, paper receipts. And people would use those receipts as money. And Goldsmith started giving out loans and basically we’re creating money out of thin air.

It’s sort of what the banks do now. When you deposit money, the bank goes ahead, lends that money out, and now your money’s in two places at one time, which is called the fractional reserve money system. So goldsmiths were giving out more claim checks than they had gold, which is just exactly like what happens now when everyone comes to the bank and wants their money at one time. We call it a bank run. It’s funny how things really stay the same or don’t change. And historically we’re seeing a lot of the same stuff happen now that’s happened hundreds of years ago.

So now, with money being created, the central governments wanted to start getting involved in this. And they knew how to tax, and they knew how to raise money. But what England did was they created the Bank of England. And the first thing they did is they sold shares to the bank. Everyone wanted to invest. I think a week after it started, they raised over a million dollars or a million pounds actually, and the king promised to pay 8% interest on that money.

So to pay the 8% interest, he just instituted a new tax on shipping to pay it. He then took all that money and funded a war with it. By doing this, it created a safe way for people to trade some money now, get some money later, similar to how people deposit money in the bank, get interest.

In the 1700s, England again tried to create a currency based on gold and silver, which really created the international gold standard and made international trade a lot easier. So what happened is you’ve had all these different currencies or different monies across the globe; it’s impossible to tell what’s this worth or what’s that worth?

Now if you tied it to gold, you can kind of tell the value of dollar is this versus the value of a pound is this, and it’s the same amount year in and year out. So that was one of the progressions where it got tied to gold and silver to give it some backing on it.

Then in the early 1800s, you had first notion of a federal banking system was created in the US. So it started with a central bank, and then there was about 200 local state banks. And at that time, it was basically free banking. States passed laws that said if you followed the law, you could print money and become a bank. States did try and keep the banks honest by sending inspectors, checking on the banks, forcing them to have a minimum amount of gold and silver on hand. But it’s really the first time we really saw a central banking system within the United States.

In the late 1800s, you saw the private sector get involved. And Thomas Edison was one of the first to jump in on this. He created a company to raise money called the Edison Electric Light Company. And what he did is he created this company and took on investors. They were promised profits in any light bulb that he created and any patents that he had. So he was able to take in money, raise money, and people were able to invest in it and invest in a company similar to how you have investments in companies now.

Now turn into the 1900s, we had the Great Depression. It was essentially a bank run that happened, and that’s everyone going to get their money from the bank, and it just dominoes from there. The Federal Reserve as we know it today, it was created in part to prevent that.

So that’s when the stock market crashed in 1929. Fed flooded banks with cheap loans so that you can prop the economy up, keep it going. It did take time to do it. And a lot of what the Fed was supposed to prevent, it actually caused a problem back then with respect to raising interest rates or creating this deflationary spiral, instead where they should have lowered interest rates. And with the Great Depression, we saw really a stronger central banking system in the US.

Moving on into the mid 1900s, in I think it was 1971, the US officially broke the link that it had to gold, and it became the complete job of the Fed to manage the value of money, which is interesting. Now you have this government that actually dictates what happens with money, what’s money worth, how does it control inflation? Then the next thing that happens is you have the financial crisis of 2008. And became this what was called the shadow banking, where they were inventing products including things like money market funds where they would take in money into something called the Reserve Fund. And the Money Market Fund became a big buyer of commercial paper. And then you have some a lot of the banks that we know now, Citibank, Chase; they were starting to lend money to investment banks. And then these investment banks were going ahead and creating all these mortgage-backed securities, or what you’ve heard of from the housing crisis, that basically started a bubble.

And it was similar to a bank run in that people became nervous on some of these securities that these financial institutions were creating and recalled their money. Companies like Lehman Brothers or Bear Stearns didn’t have the money, and basically that’s what caused the bankruptcy back then. Fast-forward to where we are now, no one walks around with paper money anymore. I guess there are some people that do it, but everything is now electronic. And I think what we saw along the way is each change to money, it was really done to solve some sort of problem, from bartering to gold and the problems with having a gold backing to having a central regulator.

What you hear about cryptocurrency now and probably what you’re going to talk about in the future, it sounds similar, what cryptocurrency was made for. It was to solve some of the problems with the money system now. So I think it will be interesting to see what’s next. In 10 years, there’ll be another chapter to the history of money ’cause I’m sure it will evolve from there.

Kayla: Thanks for the history, Marc. I know when I was reading the book, I knew the history of the 20th century and how that works because it influences so much of today, but I never really thought about how you were mentioning how the Chinese emperors in the 1300s would you use paper money and how that still is influential today. Also the gold standard and how we got off of that, just how those attitudes change about value and stuff. And I know John was going to talk more about how money derives its worth and how we think about it as a topic.

The Concept of Value and How Money Derives its Worth (fiat currencies)

John: Yeah, I still have trouble as I continue to think about this. It’s so strange and hard to wrap your head around fiat currencies in the sense that it’s really just based on trust. It’s this paper or a bank account that you have on your computer that’s based on trust. It has no intrinsic value. There’s no use value to it. So sometimes when you’re thinking about it, you can kind of get yourself caught in this… You find yourself looking for, okay, where does it go next? Where is this dollar that I have in my hand? Why is it worth a dollar? Why is somebody accepting it? And at the end of the day, at the highest level, is the trust in the money itself.

Because before fiat currencies really became the norm, you at least had this idea, okay, I have this dollar, and I know that I can go to the bank and there’s gold. There’s something physically that is behind it. And I imagine how hard it must have been for everyone to make that leap from, “Okay, we’re going to just get rid of this thing, this commodity that is actually giving us this value in and say, ‘Okay, by the way, we’re going to flip the switch and now, all of a sudden, all of the money that you’re going to be spending is going to be controlled by the government, and you just have to trust us.'”

There are other reasons or ways that economists and even speculators will look at currency and try to understand its value. But at the end of the day, all those things are really rooted back in this trust, how people feel about the US economy. And it wasn’t just a shift that the US took from this gold standard, it was the entire world. So what was really born in essence was this whole new global economy that had way more consistency across borders because most countries were using this gold standard.

And what you’d look at is this flow of gold across borders based off of spending within a certain country or certain countries investing in other countries or buying goods from other countries. Now all of a sudden, that gold is gone, and now you have all these currencies that are now valued against each other, so that the complexity of coming up with what the value is for a fiat currency becomes very complex.

But in the simplest sense, along with that trust is this idea of supply and demand. When you look at the US dollar, if our economy is doing well, or people from other countries suspect things are heating up here, our economy’s heating up, they’re going to want to be part of it, so there’s going to be a high demand for dollars because they need to then take their currency and buy more dollars.

And this drives up the price of the dollar because there’s a demand for those dollars. They invest in companies, whether it’s through stock or through bonds. There’s this flow of capital from outside the country in. And then the other part of that too, and they do more or less go hand in hand, is this purchase of goods from the US or whatever country it is; I’m just using the US as an example. So as countries might, there’s products that we’re generating that they’re purchasing from us, those other countries need to then exchange their dollars for the US dollar, and that also drives up the demand as well.

So there are these underlying flows of money that are going to generate whether or not the dollar is going to go up and down. But I do find it the most interesting that it is built in trust.

And it was a long struggle. And Marc even mentioned that I think it was back in the 1800s when Andrew Jackson was elected president, it seemed like it was going to take hold, and then he was a little bit more, for lack of a better word, against the government control that’s there. But the struggle really, I think, was not only this idea, which seems just so strange that you’re now going to have this currency that’s going to be built on trust and controlled by the government, but the shift towards government control as a whole is always a political-driven movement. And it’s no different across all the things in politics; there’s those who are against government control and those who are for government control. So there was a lot of pushback from those who were against or maybe more libertarian that would not want to see this, the government take more control, regardless of whether or not it was money versus some other things.

So it was a very politically-driven decision and movement. And with all that said, it’s hard for me to wrap my head around a world that doesn’t have a government that’s actually helping us control the value of the dollar. And it became pretty evident when in the book he was talking about the idea of debt and how that was the deal-breaker when it came to the value of money. Because he even gave the example of there being times when companies would actually give people a raise, and everyone would be like, “Oh, great, we’re getting a raise.” And it’d be like, “No, you don’t understand. This isn’t really a raise. This is just the dollar value fluctuating.” And then on the other hand, they would actually pull back when things would go in the opposite direction; they would actually decrease their income, and everyone would be upset.

And it always be the same explanation: “You don’t understand, you don’t need as much money to buy the same basket of goods.” There is that disconnect. And in essence, the gold standard was really hurting those who are weren’t as well-off because of any debt that they had. Sure, their income might go up and down based off of how much they could buy, but the loan payments that they need to make on debt would remain the same. And I think that was really where the mentality towards the idea that the poor and the middle class were being pinched and brought this almost political movement towards saving the middle class and much of the different areas we see in the political arena today eventually. And quite frankly, I’m surprised it took till 1971 to make it official.

I actually really enjoyed some of the stories, and I thought it was really well done and really opened my eyes to a lot of different areas that I never really thought of. I always just assumed that it was purely a barter. It just makes sense that if you’re a farmer and you have all these vegetables, but you need meats, sure, at a certain point you could trade, but it just makes sense that it would be 100% driven by that. But he did a really great job of using stories and characters, and I would definitely recommend the listener read, for sure.

Kayla: Yeah. A lot of what you were saying about the gold standard reminded me of the part of the book where he was talking about in the early 2000s when a bunch of European countries switched to the Euro and how it hurt the people in Germany that had strong economies, but it helped countries like Greece that had weaker economies. But now I’m going to turn it to Kira to talk about how money influences power and all of the implications it has on society.

The Power and Influence of Money

Kyra: There’s no one specific section of the book dedicated to the power and influence of money. Instead, it is weaved throughout.

I’ll give you some examples.

We see it in the chapter about the invention of the stock market, when Le Marie began spreading rumors about problems with the Dutch East India Company (or VOC) — that ships were sinking and getting captured by the enemy — influencing the price of VOC shares to fall.

We also saw it in the re-telling of the story of John Law’s the Banque Generale — the first full-fledged bank in France — which was so small to start that it was based in Law’s house. Almost nobody in France wanted in… that was, until the influence of his friend The Duke of Orleans came along. In the summer of 1716, Orleans sent chests full of gold from the Royal Mint to the Banque Generale and suddenly, the whole country believed in the bank. A Paris magazine described, “…everyone believes that it will hold up because royal funds are going into it.”

Later in the book, we saw Law’s power and influence play out again in the re-telling of The Mississippi Bubble. There were stories in France of the great riches in Mississippi: an emerald mountain, vast silver deposits, hundreds of prosperous houses… In fact, there were no emeralds or silver. And, at the time, French settlers had only built a total of four houses in New Orleans.

And then there’s the story of the lightbulb. Goldstein wrote, “It was money, as much as anything, that made the lights go on.” That’s because Thomas Edison was rich and famous. He had what the author describes as an “invention factory” next to his house, where he paid scribes and mechanics and machinists and blacksmiths to help him invent things. To afford the invention of the lightbulb, he created a company — The Edison Electric Light Company — and people flocked to invest in it, because they wanted a piece of the patent.

But, also on the topic of power and influence is the general principle of this book — “the true story of a made up thing.” All in all, we learn that money is a made up thing. That’s because the thing that makes money money is trust — when we trust that we will be able to buy stuff with this piece of paper, or this lump of metal, tomorrow, and next month, and next year. And in order for that to take form, influence is at play. Influence by big movers, small movers, businesses, governments, millionaires… Everyone and everything in society is influenced, and creates influence. 

Kayla: Yeah. It’s crazy how the concept of money comes down to trust, and how our society trusts a central bank to control the money supply. 

Technology and The Future of Money

The last part of the book that I wanted to talk about was technology and the future of money. There’s a couple chapters at the end where he begins talking about the rise of digital currencies and how Bitcoin came to be. And originally in the two 2000s, it was used to buy drugs and things they shouldn’t have been buying, but people liked the animosity of it and the decentralization, and that built a real case for why people like using the digital currency. And it’s just people are now trusting this and the blockchain and how those transactions can happen without… It takes the central authority out of it, like the central bank, and it allows people to not have to rely on the banking system in that way.

But then he goes on to talk about how central bank digital currencies, which is a fairly new topic. It doesn’t exist in the United States yet, but the idea is that the central bank could come up with just a digital currency. Like how it sounds, it would kind of get rid of the need for physical cash. I thought that was really interesting, and I could definitely see that becoming a real thing within the next few decades. But then he just goes on to say how, beyond digital currencies, there’s mobile payment platforms that we trust and peer-to-peer lending services that exist and crowdfunding. And it’s just crazy how much the banking system’s changed and how much it hasn’t in 2000 years. 

Now I’ll turn it back to Marc to wrap up the episode.

Marc: Alright, that’s all we have for today’s episode. If you’re interested in reading Money: The True Story of a Made-Up Thing the book is available on Amazon. And if you liked this episode and would like to listen to any of our past Book Club episodes, we will link to them in the resources section of the show notes.
Thank you to everyone who tuned into today’s episode. Don’t forget to follow The Agent of Wealth on the platform you listen from and leave us a review of the show.