What is Money?

A simple question with profound implications & some funny bits

These two young fish are swimming along, and they happen to meet an older fish swimming the other way, who nods at them and says, “Morning, boys. How’s the water?” And the two young fish swim on for a bit, and then eventually, one of them looks over at the other and goes, “What the hell is water?” David Foster Wallace, 2005 Commencement Address to Kenyon College 

Last week’s Budget consolidates the role of big government in our economy and financial markets for the rest of this decade. However, the ideological construct of Reeves’ plan is not a radical departure from what has gone before.

The £120bn increase in borrowings undertaken over this Parliament's life will ultimately require monetisation, something most people (including working people) have little regard for but is a vital input for bond investors’ calculations. For this reason, 20-year duration gilt yields now trade at a similar level to two years ago when Liz Truss and Kwarsi Kwarteng were in charge.

Rachel Reeves said her Budget was wiping the slate clean, and everything had to be paid for, including her inherited black holes. You may or may not agree with the dispute with her predecessor about the accounting nuances involved, and, for the most part, it is irrelevant as far as investors are concerned. This is a dispute over how the deckchairs are arranged on the Titanic that is our national balance sheet.

It is important to remember what Chen Zhao of Alpine Research pointed out earlier this year:

To ask where the limit is for government debt accumulation is identical to asking where the limit is for money supply for the same economy ... In the end, money and government debt are the same thing. The only differences are that they have different maturities, and holders of government paper are paid interest.

What the Chancellor and her predecessor agree on is the form of money in which these disputes are being discussed. Much like David Foster Wallace’s two young fish, the thought of the nature of the medium they swim in doesn’t occur to them. Why should it?

Today, some investors are puzzled as to why the price of gold could be moving to new highs at the same time that bond yields rise. They, too, need to check their aquatic knowledge and ask themselves to reconsider, what is money?

In 1976, Freidrich Hayek wrote an IEA pamphlet on The Denationalisation of Money. He introduced the idea of competitive note issuance, which he considered preferable to a government monopoly. Like Milton Friedman, Hayek sought a way to control the ruinous levels of inflation experienced in the 1970s. However, his solution was more radical than that of the Monetarists. Hayek believed central banking and the control of monetary aggregates to be a dangerously collectivist idea.

He said,

There is no answer in the available literature to the question of why a government monopoly of the provision of money is universally regarded as indispensable. It has the defects of all monopolies.

A few years later, Hayek said,

I don’t believe we shall ever have good money again before we take the thing out of the hands of the government. That is, we can’t take it violently out of the hands of the government; all we can do is introduce something they can’t stop.

Amazingly, Hayek seemed to imagine Bitcoin long before the personal computer, the internet, and any conception of a cryptographically verified digital asset. He epitomises the old fish in David Foster-Wallaces parable. Money is the water we swim in, but most never give it a second thought.

Hayek was widely derided for his commodity theory of money and the outrageous idea that we should consider a return to privately issued currency. He was directly at odds with theorists who believe money’s origins are based on credit. While hard money theorists today are characterised by the Austrian School in the tradition of Hayek, Mises and Menger, the credit theorists form the basis of fiat money and Modern Monetary Theory, typically an offshoot of the Keynesian School.

In today’s Sunday Times Matthew Syed flirts with the idea of hard money, lamenting the UK’s 200 years of gold convertibility and the unprecedented prosperity it enabled.

I invite you .. to ponder what this sweep of consistent convertibility said about Britain, its institutions, its culture and its moral discipline…Think of the temptation that would have faced the authorities to debase the currency, to move beyond the banal discipline imposed by stable convertibility. Think of honey-tongued populists of the day suggesting that if sterling were devalued, all our problems would be solved. Come on — let’s cut loose, guys! And yet something mysterious and, to my mind, beautiful held us back.

Today, the world of established fiat money is breaking, and similarly to the 1970s, investors are being drawn towards other forms of hard money and real assets. Lyn Alden’s Broken Money is one of the best explainers of money, where we are today, and how we can innovate towards better money.

Robert Breedlove’s podcast series, The What is Money Show, provides an excellent resource on this profound but challenging philosophical question. His fifteen-episode mini-series with Michael Saylor is probably the most complete attempt to outline the thesis of Bitcoin as the hardest asset known to man and the diligence behind Saylor’s adoption of it as the balance sheet reserve asset for his NASDAQ-listed company, Microstrategy. Since adopting Bitcoin as its treasury reserve asset in 2020, Microstrategy’s stock price has increased 6-fold, outperforming Nvidia and the six other Mag Seven constituents.

Breedlove and others turned to Ayn Rand, the author and founder of objectivism, for the most powerful espousal of the philosophical basis of money and private property as a bedrock principle of human progress. His reading of Fransisco Daconia’s money speech from Rand’s novel Atlas Shrugged is suitably moving, beginning with the classic framing,

So you think that money is the root of all evil? [...] Have you ever asked what is the root of money? Money is a tool of exchange, which can't exist unless there are goods produced and men able to produce them. Money is the material shape of the principle that men who wish to deal with one another must deal by trade and give value for value. Money is not the tool of the moochers, who claim your product by tears, or of the looters, who take it from you by force. Money is made possible only by the men who produce. Is this what you consider evil?

In a slightly different vein today, Dominic Frisby continues the eclectic line of first-principles thinkers who have considered money and asked some basic questions about its problems and how investors might overcome them. Unusually, Frisby combines his career as an author, comedian, singer-songwriter, Substacker, and fitness guru with a self-taught investment commentator and hard money advocate. His book, Bitcoin, the Future of Money, was written in 2013. Frisby talks, sings, and writes extensively about the attractions of gold and Bitcoin. He might be the only stand-up comic doing Bitcoin.

Dominic compares Bitcoin to the House of Lords; everyone knows it's expensive, but no one knows how it works.

For the more dystopian-minded and Matrix fans, this is probably the best Bitcoin meme explainer:

For those who want to resist Bitcoin’s orange pill, are repelled by Rand’s capitalist ideals and are content to swim without understanding what money actually is, I asked Google’s Gemini AI chatbot to give us the “approved answer” to the title question. Hey Google, what is money?

Money is anything that is generally accepted as a medium of exchange, a unit of account, and a store of value.  

Here's a breakdown of its key functions:

Medium of exchange: Money facilitates transactions, allowing people to buy and sell goods and services without the need for bartering.  

Unit of account: Money provides a common measure of value for goods and services, making it easy to compare prices and make economic decisions.  

Store of value: Money can be saved and used for future purchases, preserving its value over time (though inflation can erode this value).  

Historically, money has taken many forms, from shells and beads to precious metals like gold and silver. Today, most money exists as fiat money, which is government-issued currency not backed by a physical commodity.  

Money plays a crucial role in modern economies, enabling trade, investment, and economic growth. It also serves as a tool for social and political interactions, shaping power dynamics and influencing individual behavior.  

Below is a preview of my recent pre-Budget conversation with Dominic Frisby. We discussed the nature of money, the merits of owning Bitcoin and gold, Libertarianism and some fitness tips for the over-50s; an episode with something for everyone. If you like what you hear please consider subscribing to In The Company of Mavericks on your usual podcast app: