In this episode of Bitcoin Study Sessions, Lucas and Grant discuss chapters 9-11 of Lyn Alden's "Broken Money," which cover the rise and fall of global monetary orders, including the impact of war, the Bretton Woods system, and the rise of the petrodollar.
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Summary:
The discussion begins with a recap of the previous sections of "Broken Money," starting with the basic question of what money is and the two main systems, credit and commodity. The first part of the book details how money serves as a ledger for recording transactions and ownership. The conversation then moves to the birth of banking, which initially served as a way to abstract commodity money, like gold, into more convenient credit IOUs for faster transactions. The trend, however, was for banks to issue more IOUs than actual gold reserves, leading to fractional banking and centralization under a central banking system.
The conversation then delves into the geopolitical implications of banking's development, focusing on the rise and fall of global monetary orders covered in Chapters 9, 10, and 11. Chapter 9 discusses how countries printed money to fund World War I, leading to rampant inflation and government control over economies. The UK's role as the world reserve currency allowed it to siphon value from developing countries. The government's control over ledgers increased, enabling them to devalue savings and redirect funds towards government-deemed worthwhile causes.
Chapter 10 examines the Bretton Woods system established after World War II to facilitate international trade amidst currency instability. The system aimed to solve the problem of distrust among countries' ledgers. Two visions emerged: the Bancor, proposed by John Maynard Keynes, which was a centrally managed system based on a basket of currencies; and the U.S. dollar system, where countries pegged their currencies to the dollar, which was pegged to gold. The dollar system won due to geopolitical reasons, but it was short-lived. The U.S. gold reserves decreased as the number of dollars increased, leading to Nixon ending foreign redeem-ability of gold in 1971, marking the end of the Bretton Woods system and the beginning of the modern fiat currency regime.
Chapter 11 explores the rise of the petrodollar system after the end of Bretton Woods. The U.S. created the petrodollar system through an agreement with Saudi Arabia, where the U.S. would buy Saudi oil, sell them military equipment, and ensure the Strait of Hormuz remained open. In exchange, Saudi Arabia would invest their surplus petrodollars in U.S. Treasury securities and only sell oil in dollar terms, solidifying the U.S. dollar as the global medium of exchange. This system led to the U.S. stabilizing its currency with high-interest rates, which hurt debtors, especially in Latin America, leading to the "lost decade." Additionally, the invasion of Iraq may have been related to Iraq's decision to sell oil in euros instead of dollars, threatening the petrodollar framework. Alden concludes that in the fiat era, the country with the most economic and military power controls the world ledger. The modern global monetary order, from the mid-1970s to the present, is characterized by the U.S. dollar as the primary unit of account for international trade, with U.S. dollar deposits and Treasury securities as the primary savings asset for foreign reserve holdings.
The discussion then moves towards conspiracy theories and the real world and that Alden does a good job staying above them even though a lot of her reporting is line with common conspiracy theories.
Lucas brings up the Bank of England that went into World War I on false pretenses by defrauding and lying to the public. The hosts discuss that the United States got into World War I after the sinking of the Lusitania, which was sunk by German U-boats.
Lucas asks Grant if there was anything in Alden's book he learned that wasn't in "Creature from Jekyll Island", the answer was that Alden has the benefit of writing her book after some more things have come out, and she's able to tie a few more things together.
Grant mentions the 9-11 attacks and the attack on the Pentagon which claimed that $2.3 trillion went missing. Lucas states that Alden's final conclusion is who controls the ledger in the fiat monetary global regime, the answer is geopolitical, whichever country has the most economic and military prowess.
They discuss the role of technology in disrupting economic stability, stating that when you enter the era of telecommunications, you can't simply continue to naively use gold as a currency.
Lucas says that had John Maynard Keynes' suggestion of the Bancor have gone through, it would have quickly led to a one-world government.
Grant says the Bancor would have had conflict and lead to a World War III.
Grant and Lucas agreed that if you optimize for speed, you're going to destroy everything.
Lucas then discusses the hardships his parents endured in 1979 and 1980 after they bought the farm. The final part of their conversation goes into fractional reserve banking. Grant pushes back and calls fraction reserve the moral hazard. Grant and Lucas then have a conversation about Micheal Saylor's Bitcoin investment scheme.
