The Evolution of Money with Niall Ferguson* of the Hoover Institution

Jeremy - 00:00:05:

Hello, and welcome to The Money Movement. We are on the sidelines of Davos today, and I’m very, very excited for this conversation with renowned historian, Fellow at the Hoover Institution, and I think someone who’s thoughtful on many dimensions of civilization and the role of money and many other facets of the social, political, and economic system. Niall Ferguson. Welcome to The Money Movement.

Niall - 00:00:30:

Thank you, Jeremy. Good to be here.

Jeremy - 00:00:31:

Absolutely. So we had a bit of a conversation yesterday and there’s lots of stuff we can pick up on at the Ft event. But maybe just I was interested in maybe starting just talking about some of the major influences on you in your own kind of studies of monetary systems, economic systems. I noted in your bio a number of names that were also influential for me when I was an academic, not like you, but in my own kind of political economy studies, and in particular Frederick von Hayek. And I think Frederick von Hayek is underrated potentially in potentially having kind of considered things that are now upon us. Maybe. I’m just interested to start with your reflections on von Hayek and the relevance of von Hayek’s thinking on today’s conundrums in the international monetary system.

Niall - 00:01:28:

Well, I can date myself a bit, Jeremy, by saying that I was a young Thatcherite in Britain in the early 1980s, and it was often said, and it was true that Margaret Thatcher would carry around a copy of well, it was actually the Constitution of Liberty. And she would take it out from her famous handbag, bang it down on the table and say, this is what we believe. This is what we believe. And it kind of was what I believed as an Oxford undergraduate. My introduction to hike came via Keynes, and I probably wouldn’t have heard of hike until I had been made to read The General Theory, which was part of doing history in my day. I preferred economic history options as a student because having grown up in Scotland and having had a Scottish education, I was simply better at math than the English students. So it was to play to my comparative advantage to do economic history papers. That’s how it all began. And one of those options was, instead of doing political thought, you did economic thought. And that meant reading Adam Smith. I’d already read the Wealth of Nations as a schoolboy. Karl Marx and John Maynard Keynes. So it was reading the General Theory, which I found extremely hard going, that introduced me to one of Keynes’s great critics. And that’s really how Hayek came into my life. And so I realized that here was a theorist about economics, but also hate was more than that. Hayek was a theorist about society, used the word civilization, one of the clearest thinkers about about Western civilization and its essential foundations. And so I think he became a kind of intellectual companion for me from a relatively early age. Then when I went on to work on inflation as a doctoral student, I did my PhD on the German hyperinflation of the early 1920s. I kind of reencountered Hayek as one of a number of thinkers who had been moved by the events of the interwar period to think very hard about the causes of inflation.

Jeremy - 00:03:36:

Interesting. So famously, maybe in some circles famously, but one of his last published works was the Denationalization of Money, that set of essays, which I reread in 2012 and 2013, as I was thinking about founding Circle. And, you know, he envisioned it, I think it was 1979, which was again right on the verge of the Thatcher era. But he envisioned a world where there was competition in currencies, that there could be private-sector innovation in currencies. And he certainly didn’t envision the Internet, those famous interviews with Milton Friedman where he does envision digital cash and so on. But he envisioned that there could be competition in the capabilities, even like the features of the medium of exchange. And I think a lot of people have focused so much in current times when they think about a currency, they focus more on the sovereign component of it. Is the country good for its debt? Is it a good currency because the country is good for its debt? But he was arguing, it seemed to me, that there could be competition based on actual many factors. And we’re in the early stages of digital currency. Of course, we’re only ten years into this, but one can imagine that this is now a new, competitive playing field. And I don’t know if you have any reflections on von Hayek’s thinking on that and its relevance to today. I’d be very interested to hear your thoughts.

Niall - 00:05:09:

But partly because Hayek was skeptical of the state, and particularly its 20th century ambitions to plan and control most walks of life, he naturally asked the question, would it be possible to reduce the power of the state so that it wouldn’t be subject to these temptations? And when you look at it historically, you realize that there isn’t some God-given right that states should have a monopoly of any kind of money. And so I think it’s partly as an historian that I can underline the legitimacy of Hayek’s argument. The idea that the state is essentially the monopolist of money is actually a relatively recent origin, the 1970s even, right? And in fact, it’s only really with the breakdown of the Bretton Woods system that you get the pure fiat currency era. And in that period, central banks are clearly under the control of the state almost everywhere, even anomaly. They’re not. In practice they are. And it’s really in the aftermath of the World Wars and the period subsequent to that that central banks essentially become the handmaidens of government finance. They played that role in the past, but only really in time of war. After 1945 it sort of became the institution for peacetime, too. But if you go back in time I mean, think, for example, about the 16th and 17th centuries in Europe. Although there were plenty of coins with the heads of sovereigns stamp on them.

Jeremy - 00:06:41:

It was still a metal.

Niall - 00:06:43:

It was still a system of metal coinage. A lot of payments were not, in fact, made with coins. And the bill of exchange is a really interesting illustration of this point, that bills of exchange were developed after the Black Death when there was a really serious problem of monetary shortage in the wake of the Black Death. The catastrophic pandemic, forget COVID, this was the big one of the mid-14th century. There are really severe labor shortages and the old feudal order where you simply could get people to work and pay them in kind. You you keep some of the grain. That ceased to function. But as you monetize the agrarian economy, there was chronic shortages of coin in Europe, the solution that merchants came up with, particularly for what we’d now call cross-border trade, was the bill of exchange. And bills of exchange had nothing to do with the state. They were effectively IOU credit instruments. They were credit instruments that merchants generated. And then over time this wasn’t immediately the case, but over time, you developed a market whereby these bills of exchange could be traded with signatures and co signatures, establishing their credibility. This is the original cryptographic signatures. Correct. This is the medieval cryptocurrency that the bill of exchange provides. It’s absolutely crucial to growing European trade after the 14th century. And that seems to me a very important point to introduce when we’re thinking about what we now call cryptocurrency network-based validation of a transaction without the state or any state institution playing that third party role verifying or authenticating the transaction. So there’s a big precedent for this.

Jeremy - 00:08:25:

I want to come back to that. That is a big part of the thesis that we have. I want to come back to that topic. It’s a really important one. Maybe kind of I want to zoom back into the kind of currency competition piece of this, which is there’s obviously non-sovereign digital commodity money. That’s a new thing that’s emerged, and one can make an argument for or against or where is that useful? Where is it not useful? Is the idea of an algorithmic monetary policy or an incentivized monetary policy an interesting one. So that’s sort of the Bitcoin thesis, right? So we don’t need to go there. But that’s, I think, been covered in a lot of places. But you have that, and then you have these kind of hybrids like USDC, right, where you’ve got government obligation money, in a sense represented in a digital currency form factor, privately issued and intermediated. And then you have an impulse from central banks and from the central bank of central banks, like the BIS. There’s an impulse of, again, the sovereign wanting to assert itself and say no, we are the if it has to do with our currency, we are the single source of truth and therefore we should be the technology, we should be the distribution, we should do all these things. And I think there’s a tendency this gets back to von Hayek and broader political economic theory. There’s a tendency I have found in the West towards there has been people are enamored with China and if China can do this, we should be able to do it too. And what lessons are we drawing on there? That state-controlled, state-engineered and operated systems are the preferred way that we should operate our monetary systems? That seems to be the conclusion that a lot of central bank heads are taking. Is that an implicit bias that they have given the role that they’ve had since the 1970s? How should the world at large, forget about the central bankers. How should the world at large think about this contrast between open private sector technical market innovation and this impulse which seems to be a state controlling impulse?

Niall - 00:10:46:

With Hayek were here he would say that the central bankers have in a sense drunk the Kool-Aid, right? But they were the only game in town. You’ll remember that phrase coming into common parlance in the aftermath of the financial crisis. And so they are gradually accruing to themselves ever more power to the point of imagining themselves to be the planners. I just was listening to Mark Carney who has since leaving the Bank of England become more and more a spokesman for what we call ESG for short, for green finance, for using the financial system to steer the world towards clean energy. Hayek would, I think, roll his eyes at this kind of extension of central bank ambitions. Now let’s think back to the 20th century and ask what did the central bankers do with the power that they accumulated as they as they became essentially helpmeets to government finance, especially war finance? What they did was they used the power to impose inflation taxes.

Jeremy - 00:11:45:

They debased money.

Niall - 00:11:46:

They debased money. They unleashed great waves of inflation the most extreme of which I studied as a graduate student Germany in 1923. But there are lots of other episodes that experiment with this kind of state money. And the original state theory of money was a theory of a German economist active around the time of the hyperinflation. That state theory of money had all kinds of adverse consequences. Just because inflation hasn’t been a big problem for the last 20 years leaving aside the events of last year doesn’t mean the state theory of money is valid. Actually it’s a highly problematic theory. Notice economists as well as central bankers hate the fact that there is still an element of autonomy in that bank notes can’t easily be traced. They’re true cryptocurrency in terms of transactions. They would love to get rid of them. The ultimate ambition of central banks these days is to get rid of the money that they can’t directly control through monetary policy. And I think it’s understandable that citizens in a free society should be skeptical about that ambition. A central bank digital currency in China is an absolutely classic Chinese communist party project to make sure that every transaction that goes on is under the direct surveillance of the central bank and therefore of the party. The idea that we’d want to imitate that in a western country has always struck me as completely bizarre. Even if it were a very efficient way of organizing payments, which it isn’t.

Jeremy - 00:13:18:

It’s not.

Niall - 00:13:19:

And in fact, the Chinese private sector had already produced a very efficient system of payments in the form of Alipay and its WeChat equivalent, which the central bank digital currency, the ECNY, is designed to replace. And by the way, it’s not really achieving that. So I think the notion that we should somehow follow that Chinese path is deeply misconceived, but it emanates from the central bankers desire to retain control. Bank for International Settlements is the club of central bankers. And when the BIS says, as it said last year in a very striking report, we got to get rid of all cryptocurrency, we have to get rid of blockchain-based money, we have to shut it all down in order to maintain our monopoly. I think to myself, yeah, but why is it that you want that monopoly so badly? And I don’t think it’s in the interests of citizens.

Jeremy - 00:14:10:

I feel like we’re doing something right if that’s what we’re hearing.

Niall - 00:14:13:

Right. Absolutely. You above the target when you get that kind of attack. Now, what are the downsides of the Hayekian vision of of competing monies that are not under the direct control of the state? Well, can be a bit chaotic. I mean, in some ways you could say that in the 19th century, essentially there was no state money. The United States was free operating under free banking, a system that really didn’t have central state control. Federal Reserve didn’t exist in the 19th century. What was the problem? The problem was periodic bank panics. The problem was that you could find yourself being handed and either counterfeit money or money issued by an entity that would go under. So there were clearly problems, and one shouldn’t idealize free banking. On the other hand, I don’t think the problems were radically worse than the problems that arose from the state theory of money with all the inflations that it brought in its train. And not only inflations. Let’s not forget that the worst economic crisis in all of history was as a result of the Federal Reserve’s policy errors between 1929 and 1932. Milton Friedman and Anna Schwartz showed that conclusively in the monetary history of the United States. So it’s not just that central banks caused a lot of inflation in the 20th century. They did actually the greatest sin was the Great Depression, which was the biggest of monetary policy errors.

Jeremy - 00:15:38:

I want to ladder off of that actually into a topic that is one that maybe we have a bit of a debate about, which is in the aftermath of the Great Depression, there were a couple of big schools of thought about how to potentially restructure the banking system and dealing with the issue of bank runs. And there was obviously the Chicago plan which was put forward, which has been studied and reintroduced as a concept over time. And there have been attempts to look back over the last 100 years and see if we had done something like the Chicago plan, which sort of separated effectively the base layer of money as a payment system from credit intermediation and sort of this concept of a full reserve model for the payment system and a credit and lending model, but where you’re not creating new money as private-sector banks. In a sense the bank lobby won and felt that a mutualized insurance product FDIC was the better path. Right? They can still continue to do what they do. But I have a belief that it’s actually possible to create a full reserve banking system and have credit intermediation. And my theory is that part of what fractional reserve banking does is it has to do with what I call the physics of money. And in the traditional banking system, where you’re dealing with physical deposits and withdrawals, the limitations of the actual movement of value, there were benefits to being able to kind of do it on a fractional reserve basis because it in a sense created more velocity. But in a world where the base layer of money has the superpowers of the Internet where basically it can move at the speed of the Internet, at the cost efficiency of the Internet and you can write code to programmatically control its locking and unlocking and its use. My belief is that you end up with a base layer of money if it is a full reserve foundation that has extraordinarily high velocity because it can be used and reused in a sense in milliseconds anywhere in the world. And that you could actually build really robust credit intermediation on that basis and so you wouldn’t need the fractional reserve. And so you could in fact take more risk out of the financial system, but it would mean moving the risk into on-chain borrowing, lending, credit, et cetera. So that’s like a thesis that we have. And the heart of that is basically this concept that the issue here is what I call the physics of money, that if you have better physics on the money that you might actually want a full reserve basis on it, rather than a fractional reserve basis.

Niall - 00:18:34:

Let me ask you a question. Do you envision that kind of a novel system gradually displacing the old system?

Jeremy - 00:18:43:

Yes.

Niall - 00:18:44:

Because it’s superior totally. Therefore this would be a natural evolutionary process. You wouldn’t need to change the regulatory framework.

Jeremy - 00:18:50:

Correct. It would evolve out of it.

Niall - 00:18:51:

And that’s a really important concept for me, that financial history is an evolutionary process. Back at the time of the financial crisis, I wrote a study with Oliver Wyman about what I called a theory of financial evolution, taking Darwinian ideas and showing that actually financial history is a series of punctuated equilibria. There are periods where a whole proliferation of new species occurs. There are periods of great dyings. We saw one of those in 2008, 2009, and that although we’re attracted to the idea of a financial revolution, most of history is, in fact, a truly evolutionary story.

Jeremy - 00:19:28:

Yeah.

Niall - 00:19:28:

And it would therefore be very surprising if a system that evolved essentially in the 20th century were to persist right the way through the 21st century, despite a radical alteration in the technological setting. That just seems unlikely to me. The way I always come at this when I run into a super skeptic like, oh, Nouriel Roubini, is well, I say Nouriel, are you telling me that we’re going to carry on, even with the advent of the Internet, we’re going to carry on paying for things with bits of paper checks, and most absurd of all, typing in credit card numbers to random websites? Is that really how it’s going to be? Because it doesn’t seem obvious that that’s the future, any more than it’s obvious that in the future there will be things called banks with branch offices, like the ones you walk past in promenade and Davos the whole string of the banks that you walk past, and you think to yourself, well, I get why they did that. Back in the late 19th century, when branch banking really was necessary to get the savings of people all around the developing world to be taken out of mattresses and safes and put into bank. But we don’t really need those buildings in the high street anymore. I think financial evolution is moving pretty fast at the terms. And although the incumbents have tremendous power, I mean, we saw that with the making of Dodd-Frank, that the regulations that came in after the financial crisis were essentially written by the incumbents to make the barriers to entry colossally high. Good luck to anyone who tried to start a new bank back in the wake of Dodd-Frank. It’s pretty much impossible. So there’s an attempt to freeze the evolutionary process. It’s been pretty successful in the United States, where the big banks have direct access effectively to the legislature. But if you look at the world as a whole, the incumbents are being destroyed because their model is so inefficient compared with the kind of models that are being developed in what we sometimes call Web3s. I think financial evolution is on your side. I don’t know what the time frame is. I don’t know how quickly adoption takes off because that’s the unknown thing. The lesson of the last well, really, of our lifetimes is that the speed of adoption, of innovation seems to just go up. And yet with crypto, the adoption has not been as fast as it was for, say, search or social media or ecommerce. So I have a sense that, interestingly.

Jeremy - 00:22:00:

There’s a kind of structural inertia more.

Niall - 00:22:03:

More than I probably would have predicted a couple of years ago when my expectation was that this was an unstoppable force. It’s kind of hit speed bumps, and I think we should recognize that. And yet I can’t help feeling that ultimately this adoption will happen once consumers and institutions have confidence that this really is a more efficient way of doing things.

Jeremy - 00:22:24:

Yeah, we could have a whole tangent on all of the issues in the attempts in crypto to create new commodity money or to establish all these new types of tokens. And obviously we’ve been much more focused on the mundane of this evolution of what a dollar is and what does a dollar mean on the Internet, or what does a Euro mean on the Internet. And building on that, I like what you were describing as well in terms of the kind of the situational awareness of the technological change and what that means for the evolution. One of the themes that I’ve come back to a lot and my background, as you know, is I kind of grew up on Internet platforms, Internet software platforms, Internet protocols. That was sort of where the milieu I was kind of coming from when I got into this space. And this comes back actually to where we started with the China reference as well, which is the Internet itself is an expression I believe, of largely kind of Western liberal enlightenment ideas. It’s open, decentralized, it’s based on kind of free market association, open intellectual property. And that was the creators of the early Internet, actually. They held a lot of those convictions. And in fact, open source technology is this deeply liberal kind of expression. And so that’s like this imprint of the Internet. And what I’ve been always interested in in my career is how does that DNA kind of play out across different industries, different parts of society? And it has played out right. And like you said, the zero to a billion has happened at increasing speed. But it’s this kind of anchored in these ideas of open, decentralized, open-source technology, open standards, free and open access. And if you go and listen to the BIS or if you look at what, say, China is saying, here’s how we ought to do it. It’s almost like the Internet doesn’t exist in their mind. It’s almost like the idea that you might be able to build on that kind of infrastructure, a financial system, is like such an anathema to the tight control that’s needed. And be interested in your reflections on the ethos of the Internet with respect to the future of the monetary system.

Niall - 00:24:54:

Well, it’s fascinating because if you had asked the makers of ARPANET or fast forward, Tim Berners-Lee, the World Wide Web, there was unquestionably a commitment to open architecture. I mean, the whole idea was distributed networks so that it wouldn’t be easy to take out with the nuclear strike. That’s really where the notion arises. But it clearly aligned with a libertarian spirit which was quite at home in those days in Northern California. I think nobody, including Tim Berners-Lee, expected that the key to making money on Web 2.0 would be selling ads, and that the way to maximize returns on ad sales would be to have highly centralized platforms, two sided markets, and exploitation of data that was essentially acquired pretty cheaply in return for okay and sometimes better than okay services. I don’t think anybody foresaw that that would be how it played out. I don’t know, maybe Jeff Bezos had some profound intuition that was denied the rest of us. But Amazon was the first of these true network platforms and for a time it seemed as if the future of the Internet was to be dominated by a relatively small number of these centralized platforms. Scott Galloway’s vision, I suspect that will turn out to have just been a phase. And it’s not clear to me that the future of the Internet, and certainly of Web3 is going to be centralized. It might be. I mean, we have to leave open this scenario, the Chinese model of Alipay, of centralized platforms exploiting AI and data, big data to arrive at super good credit decisions. Maybe that is the future. I hope not. I have a nightmare vision which is out of, I guess, some kind of Neal Stephenson Sci-Fi book that there is just in the end, one enormous two-sided market giant platform with an insatiable appetite for data. And it does it all. It provides all the financial services, the transaction costs are basically zero. No one can resist. It’s so efficient. You get your credit score back and your credit decision and the money is there all in seconds. That could be a future. I think that was Jack Ma’s vision. If you talked to Eric Jing, Ant Financial, before they got in trouble with Xi Jinping, that was his vision. And I remember going back to Washington and saying, you do realize they’re trying to build an entirely alternative payment system that will come to dominate at least emerging markets. I mean, luckily for us, Xi Jinping killed that or at least put it on hold and went down the Central Bank Digital Currency route, which I think is a dead end. The question of what evolves in the Western world seems to me still open. And Peter Thiel’s had this great aphorism a few years ago, I think it was four years ago that he said it the AI was communist and crypto was libertarian. That still feels right. It feels to me as if we should be trying to encourage decentralization and competition, and there’s certainly plenty of competition going on and privacy. We have to make sure that we design our payment system, our payment system of the future so that our data is not, in fact, accessible to any platform that’s willing to pay for it or steal it. These design problems I don’t think we’re close to having solved. And that’s part of what makes this an interesting moment in time.

Jeremy - 00:28:23:

Right. It’s fascinating. Right. There’s a lot of energy in the crypto community around decentralization, privacy, preservation, self-sovereign data, all self-sovereign identity, and trying to resist centralization, whether in the government or corporate forms. Right. And I think the impulse is a tremendously important impulse because we don’t have that impulse. If there aren’t computer scientists that are pouring themselves into this, we’re putting civilization at risk. This is like a civilization issue because this is the Borg. Is the Borg going to come in? Or are we, as humans responding to the Borg with our creativity and our innovation to resist? I think there’s a trap that I find, whether people in the financial industry or in policy making, there’s a trap which is one that people very easily fall into, which is basically, well, we have to have we have to be able to stop terrorists. We have to be able to sanction bad actors, and therefore we have to completely erode privacy, and we have to completely segment and isolate parts of the world and the population from free exchange of value. And this is partly a reaction to 9/11 and certainly geopolitical and everything else, but that impulse to give up on free exchange of value and privacy is so strong, and it feels like it needs to be resisted. That’s not to say criminals should run free and terrorists should run free, but there is, in a sense, a trade that society has to make. They have to make society, I believe, in kind of the energy of society at large, ultimately driving and influencing policy and not the other way around. And so in the same way that basically everyone in the world has access to free encrypted, peer to peer communications, and no one seems to be able to take that back, and people don’t want to give it up, and it happened. It does seem to me that there’s this choice that many parts of the world have to make about what kind of world do we want to live in with respect to how we can preserve privacy and exchange value.

Niall - 00:30:54:

The three enemies of individual liberty that are working together are the one you mentioned, which is the state’s perennial desire to prioritize security over individual liberty. And 9/11 gave that a new lease of life. I mean, there already have been plenty of assaults on liberty in the time of the world wars and the cold war, but 9/11 brought it all. Back to the fore and legitimized the notion that there should be great powers accrued to the state in order to root out the terrorists amongst us. The second great enemy of individual liberty and privacy, which is part and parcel of liberty was, of course, the network platform’s desire to monetize the data. And you can understand where that led. The third enemy is our terrible weakness. We want convenience. We’re in a hurry, I agree are the two most dangerous words in the English language. Now, Tocqueville, we’ve talked about Hayek earlier, but let me bring Tocqueville in one of the greatest thinkers about individual liberty of the modern age. Tocqueville understood this very well. He could see that people would be willing to trade liberty for equality. That’s one of the central arguments of democracy in America and the old regime that there are all these reasons why liberty would be thrown overboard. The state would want to centralize and we would vote for equality over liberty. But if we told Tocqueville about the new threats to liberty, he’d be, if he were here, absolutely appalled that we are willing to trade privacy for convenience is a tremendous Achilles heel for the species. So I hope the libertarian impulse is still alive. Well, I think it is in the United States more than in Europe. I’m always amazed at how readily Europeans will give up individual liberty and hand the power of censorship to the state at the drop of a hat. The United States still seems to me to have in its DNA a belief in the individual’s freedom. It’s why I think Americans will cling to banknotes longer than anybody else. It’s, of course, why they like to have guns in their houses. The question is, can you take that impulse and educate it so that it actually has a real use in the 21st century? Now, I’m not sure how one does this. I think at this point it’s a minority belief that we should take full advantage of encryption. At this point, it’s a minority belief that we should try and get outside of the legacy financial system which is, in fact, highly exploitative in many ways. Let’s just remember one problem which we haven’t talked about is financial illiteracy and innumeracy. I mean, future historians will say it was a highly financialized society that essentially expected everybody to get into debt at a fairly early stage in their lives. They very carefully made sure that they didn’t really understand how debt and interest work. We educate our kids incredibly badly about these things and then we expect them to manage mortgages or student debt.

Jeremy - 00:33:59:

Modern chattering.

Niall - 00:34:00:

I think proper financial education as part of a kind of modern civics would make people realize a little bit better the pitfalls of the kind of centralized systems that we would like to see fade away. So I think that’s the vision and I don’t know quite how one brings this about. I think I’m somebody with powerful libertarian and individualist. But I’ve clicked, I agree or I accept more times than I’ve had hot meals this year. And that worries me. It also worries me that although I really like the idea of decentralized finance and spend a lot of time thinking about it and even experimenting with it, I’m aware that I’m bad at it. I can remember feelings of overwhelming impatience and frustration messing around with a ledger, trying to make sense of protocols with which I was unfamiliar. I know I don’t want exchanges to dominate crypto and yet convenience is so very powerful. These are the things we all have to fight against.

Jeremy - 00:35:03:

To get solving that literacy user experience and all the tradeoffs there. They’re really hard. I want to actually build off of that to come back to something we were talking about earlier, which was part of the promise of this and part of the promise of this technology as a medium of exchange is the ability to have direct economic relationships. And the power of the Internet is the ability to have direct connectivity with kind of anyone, any entity, anywhere in the world. And that unleashes a lot of economic value. And so this idea of having direct value exchange taking place, that is a place where there is this inherent utility and decentralization, right? I can settle a transaction with a counterparty anywhere in the world without an intermediary and I could do it again with security and with privacy and with great cost efficiency. That’s valuable. And I think individuals and entities, firms, et cetera, understand that it’s sort of similar to like oh, a customer can just visit my website and I can do business with them directly. Same kind of thing I could transact more directly. And so I think that is really powerful. But building on that and coming back to the evolution of money and this whole discussion around credit intermediation and the like, one of the promises of this is the concept that one could establish a market for capital or a market for the time value of money where that market was convened entirely on the Internet in the same way that we convene other markets on the Internet. Centralized for the most part. But where the markets that basically adjudicate the time value of money that those could actually happen directly and more participants could directly both supply and source capital through a capital market structure that is happening directly with people peering on the Internet. That’s to me an evolutionary stake. But also it ties into this. How do we evolve to a state where people are experiencing the value of decentralization?

Niall - 00:37:17

I don’t know if there’s a way of resolving the paradox that ultimately all capital markets require some degree of centralization. And that’s why stock markets came into existence and they came into existence just about anywhere where economic development reached a certain level. And so it seems to me that one’s going to have a role in the future for something like an exchange. Of course, I hope it will not look like the exchanges we currently see, but I don’t know that there’s a way of getting around that. I think what’s interesting to me is how far you can change the relationship between individuals and their money, or maybe I should say, and their assets and liabilities. I think one of the most exciting things that I think is now possible, that wasn’t possible ten years ago, is that you can use apps on smartphones in a way that educates people as they transact. And this is something that I got interested in talking to Adam Dell some years ago, the idea of Clarity Money was a first attempt to create an extremely convenient user interface that would implicitly be educational to forcing people to think about their balance sheet. And the more recent work that I’ve done with him aims at really a more ambitious concept, so that you encourage the individual not only to think of the balance sheet and the profit and the loss, but also, in fact, to have a lifelong strategy. My good friend Larry Kotlikoff, one of the clearest thinkers about personal finance in America, does a lot of good writing in this area to me. We can’t really have financial monetary liberty until we have an educated citizenry. And currently the problem is our people are fantastically badly educated about the most important feature of their economic lives the way their money is earned, saved or spent. We got to get that right. And once people start to understand better the lives, as it were, their financial lives, and realize that the elementary pitfalls that they’re being led towards, hey, here’s my financial advice to you. Take one large leveraged bet on a single asset class that’s housing and it’ll all be fine. And that’s the basic pitch that’s been made to several generations of Americans. And of course people fall for it just out of social habit. Well, he’s got a mortgage, so I need a mortgage. I think the first step towards the kind of future that you have in mind must be just to raise the level of financial education. Because once you do that, once people see, oh, hang on a second, I don’t have a very diversified portfolio at this particular age. I should really be doing things very differently and I need to have a different set of financial products. Now currently the legacy financial system is really just there to earn rents from people’s financial ignorance, and it works brilliantly. People are so incredibly dumb, they will borrow on credit cards with eye popping rates, which are particularly eye popping when inflation is relatively low. So I don’t think we get to the utopia that we both envision. And with a population as ignorance of financial realities as the population currently is.

Jeremy - 00:40:40:

It’s a massively important topic and yeah, it’s interesting. I feel like digital financial literacy is certainly gaining steam, right? Both in terms of entrepreneurial innovation examples that you’ve given as well. But even at a policy-maker level, there’s just a sense that in order to move our financial system forward, there has to be significantly stronger digital financial literacy. And look, there’s regulatory stuff that’s happening in the CFPB, trying to deal with predatory practices and the like.

Niall - 00:41:15:

But that’s all kind of negative. That’s right. We’re not doing really positive, positive stuff. And I think that’s where there’s an opportunity, particularly for companies like Circle to make the user experience ultimately educational. The more we move in that direction, the more I think we’re going to get a genuine popular appetite for decentralization, for privacy. I’m very impressed by the way in which technology has already achieved a pretty big leap forward in this respect. When I wrote The Ascent of Money, which was designed to be a work of financial education, the point of that book, which came out in 2008, was a financial crisis was coming. Most people were going to be completely blindsided by it. And the thing they most needed to know was where the current financial system came from. I mean, what are all these things? And that’s really what the book does. It’s a step-by-step history of each of the key components of a financial system that you’re likely to interact with in the course of your life, including insurance, including mortgages. At the time I wrote that book, I remember thinking, there is no solution to the problem of all the people in the world outside the financial system, the unbanked in developing countries, there just wasn’t a solution. I looked at microfinance, and it was not the solution that became clear immediately. But fast-forward a decade, and enormous changes have been made possible by advances in technology. So that now, all over the world, including in developing countries, there are neo banks, there are forms of payment that harness smartphones. It’s been a really remarkable transformation, and it gives me optimism that ten years from now, we’ll have made further leaps forward. So this is important. You couldn’t really solve that problem in 2008. In 2008, most people, including in the United States, were just kind of lashed the mast in the face of the storm. They had almost no control over their fates, whether they were defaulting on their mortgages or simply losing their jobs. I’ve come quite a long way since then, but we have further still to go before people, to use a phrase that has been overused, can take back control over their financial lives. That’s the thing that I’m most convinced is necessary. Once people really understand the legacy financial system, I think they’ll start to realize that there are better ways. And these better ways, I think, will enhance welfare. That’s the key. Now we can’t run the process of financial evolution on the assumption that everybody’s a potential villain. That may be how China runs, where every transaction has to be under surveillance because everybody is a potential villain. I think in a free society, default assumption is that the citizen’s honest. And if you reason to suspect a malfeasance, you have to show those reasons before you can start intruding into private transactions. We mustn’t get to the point where the default setting is that all transactions are transparent and should be legible to the regulators and indeed to the Feds. That would be a very big step down the road to serfdom to bring us back to Hayek.

Jeremy - 00:44:23:

Absolutely. And I think the space that we’re in of technical and creative and entrepreneurial work to improve the base layer of what the money system is, to use software and the Internet to improve the possibilities for privacy, security, identity, user experience. This is the work that people are doing. This is the hard work that people are doing. And it’s really encouraging to see so much entrepreneurship in this space. Lots to see in the evolution of money. And deeply appreciate this conversation. This was really great.

Niall - 00:44:58:

Thanks, Jeremy. It’s been fun.

Jeremy - 00:45:00:

Excellent.