Broken Money Review: What Is Money?

Part 1: Is Debt Money?

During the last few days, I have delved into Broken Money by Lyn Alden. Not the most practical book to carry around the beach in Merida, Mexico, but definitely worth the effort.

In this post, I will cover some of the finer details in the book that I found to be interesting, expanding into each with some of my own ideas.

This will likely be the first of a series of posts.

Let’s get to it

What Is Money? Unit of Account vs Store of Value

The book begins with a comprehensive explanation of what money is and its origin, as one would expect. Having been a monetary theory enthusiast for over a decade, I considered myself well-versed in this matter, but that changed when I first read The Bitcoin Standard. Broken Money also helped to expand on a key point I only managed to grasp, though perhaps not yet fully, a few years ago.

For years, coming from the “gold camp”, I was very much an advocate of commodity money, and believed that it was indeed commodities that made up the first form of money; precious stones, shells and cattle have been documented as early forms of money.

But that’s not really true.

The first form of money to be used was debt, probably through an informal agreement between parties. Before humans even conceived of exchanging goods, it’s likely that they exchanged and even accumulated ”wealth” through favours.

I do something for you, with the implied expectation that in the future I will be able to call upon you to do something for me. One party is essentially indenting itself though an informal and perhaps even unverbalized contract. But still, this debt is in effect money.

Lyn Alden, therefore, concludes that the first form of money was, in fact, ledgers. The first ledgers were informal records kept inside our own minds, which then evolved as complexity demanded it. The oldest written ledgers to be found are 5000 year old Mesopotamian clay tablets.

Point is, and despite what hard-money libertarians and economists might argue, that the first form of money is debt, which is a perfectly valid form of money.

In my opinion, both commodity money and credit money can, ney, must coexist, and each has its unique properties, advantages and disadvantages.

In creating a Unified theory of Money, I think it is necessary to now introduce the concept of the Pyramid of Money, highlighted in the Bitcoin Standard.

Atop the pyramid of Money is the oldest and most reliable commodity money, gold. We could argue that Bitcoin deserves a place up there too.

As we go down the pyramid, we find more ubiquitous forms of money, like US Treasuries, dollars, and bank deposits. The further down the pyramid we go the lower the “quality” of the money. Bank deposits are, in fact, credit, though they are insured in the United States up to a point by the FDIC. 

Below that, we could include even less credit-worthy money, such as a personal loan made to a friend. 

The money at the bottom of the pyramid is less reliable, yes, and in the event of an economic or, worse yet, societal collapse, some of this money will become worthless. The natural tendency will be for economic agents to try and make their way up the pyramid, trying to find refuge in more reliable forms of money.

However, it’s important to note that credit/ledgers as a form of money also offer advantages over gold, as it is easier to transact and settle in, and in times of growth it is necessary in order to grow the money supply.

In my humble opinion, as a free-market economist, it is precisely the natural preferences of free economic agents deciding which money they want to hold at any given time that will allow us to reach long-term equilibrium.

Of course, in the short-term, this means allowing economic agents to freely deleverage and contract the money supply as well as grow it.

However, there is a natural tendency for “organized societies” (ie ones with large governments) to intervene in these affairs.

This normally involves trying to prevent deleveraging and favouring credit creations, though as we will learn in the next post, it also happens the other way, with governments and rulers intervening when it comes to deleveraging the economy.