In this episode of Bitcoin Study Session, Grant and Lucas discuss chapters three and four of Lyn Alden's "Broken Money", focusing on the evolution of commodity money and a unified theory of money.
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Summary:
The podcast opens with a discussion on Lyn Alden's book "Broken Money," summarizing chapters three and four.
Chapter three details how gold emerged as the dominant commodity money due to its scarcity and resilience against technological debasement. Gold and silver survived the filtering function of technology, maintaining a high stock-to-flow ratio. The innovation of legal tender coinage further solidified gold and silver as money, adding layers of value through verifiability, convenience, and a liquidity premium. However, legal tender coinage also introduced the risk of debasement, leading to the hoarding of purer coins. Gold eventually surpassed silver due to historical factors, like England's adoption of the gold standard, and its superior divisibility with the advent of banking, making it the most saleable form of money.
Chapter four explores the two main theoretical camps regarding the definition and origin of money: the commodity theory and the credit theory. The commodity theory posits that money is fundamentally a commodity, with the most scarce and saleable commodity naturally emerging as money. This theory suggests that money is independent of the state and arises organically to facilitate efficient exchange. Conversely, the credit theory asserts that credit, not commodities, is at the core of money. Sales are viewed as exchanges for credit, with debts and credits centralized through banks in more complex societies. Credit theorists often advocate for a larger role of government in issuing currency to achieve its goals, unconstrained by the scarcity of commodities.
Alden synthesizes these two theories, noting that both visions have value, as hunter-gatherer societies utilized both commodities like shells and credit systems based on reciprocal favors. The commodity theory accurately identifies the emergence of hard money, like gold, due to its physical qualities. However, it incorrectly assumes that barter was the primary problem that stimulated the need for money, overlooking the role of social credit in resolving barter issues within small-scale societies. The credit theory accurately recognizes that human interaction is fundamentally a series of credits and debits, organized by rituals and rules tied to evolutionary instincts. However, it overlooks deficiencies such as the need for a unit of account, the limited scalability of credit beyond local communities, and the risk of devaluation.
The podcast hosts discuss Alden's unified theory of money, which posits that the underlying logic shared by both commodity and credit theories is the ledger—a record of transactions that tracks ownership. Credit theorists view humans or centralized authorities as the maintainers of this ledger, while commodity theorists see nature itself as the maintainer. Commodity ledgers, while less convenient, are not prone to debasement. Lucas critiques this unified theory, suggesting that money is essentially a technology. Abstract money, represented by social credit systems, was the first form of money, with commodity money arising later to address the shortcomings of credit. Credit and commodity money aren't competing theories, but represent successive stages in the evolution of money, akin to a four-way tire iron versus an impact wrench, where the latter performs the job more effectively.
The discussion pivots to the practical value of an abstract definition of money, like Alden's ledger theory, and how it might help individuals grasp Bitcoin as a new form of money. Knowledge and conviction are essential for recognizing Bitcoin's potential, and a robust theoretical framework aids in this understanding.
Our next discussion will cover chapters five and six.
