What to read to understand central banking
economist.com
economist.com
So yes, read. But my advice: read widely, not naively, because economic theory looks like math from the shoreline but it tastes and feels like philosophy when you dive in.
Fun starting point: learning about the different "schools" of economic thought: https://en.wikipedia.org/wiki/Schools_of_economic_thought
Everything you hear and understand about central banking as it exists today is just part of the prevailing school of economic thought. It is not the only way forward and many would argue it is not even the best way forward (but we are always led to believe it is)
ASIN : 1612194192
Publisher : Melville House; Updated, Expanded edition (October 28, 2014)
Language : English
Paperback : 560 pages
ISBN-10 : 9781612194196
ISBN-13 : 978-1612194196
I have no particular viewpoint on what central banks should or shouldn't do, and I am no more impressed with Austrian or goldbug or crypto community ideologies about the topic. I just find the discussion unsatisfying. I don't believe that central bankers are brilliant economic engineers with deep insights into the ideal economy that can only be explained to us non-experts through crude temperature/thermostat metaphors. It all seems a bit cargo culty to me.
It is a discipline where even the basic axioms are subject to disagreement and 100s of different viewpoints, yet many economists insist that it is a perfectly exact science. It is in fact a very political discipline and we would all benefit if we realised once and for all that there is no Single Truth, that the "consensus" is not necessarily correct, and that There May Be An Alternative.
In medicine, though, I have more confidence (overall) that establishment views are scientific.
Looking at statements about the housing bubble in 2008 or about inflation a few years ago I don’t trust much in the economics profession either. They seem to always be behind the curve.
I'm not an expert at economics, I think I am merely scraping the surface but everyone else? They aren't even trying to scrape, they just assume that endless growth and positive interest rates are god given.
That’s susceptible to all kinds of excuse making and allegations of sabotage and cruelty and messy edge cases and would be extremely difficult to pull off in a way that satisfies zealots, but it’d have the massive benefit of actually comparing systems outside of any given framework for reasonable people.
My own personal theory is that any given economic system’s benefit is related to the collective psychology of the populace and that there are different local maximums and systems that work better in certain situations than in others.
Ultimately the more I read the more I recognize my own ignorance about a lot of this stuff and think the more most people are more ignorant than they realize. That’s why I tend to gravitate towards systems that maximize freedom at the national/international level, as I think any restrictions that need to exist tend to be emergent locally if allowed.
That's true, but I don't think anyone outside of finance actually pays attention to the MSM narrative around central banks. Rather they get all their information from memes that have little basis in reality.
> I don't believe that central bankers are brilliant economic engineers with deep insights into the ideal economy
They aren't supposed to be. They're just supposed to make sure the money in the economy is circulating in a way that keeps it from spiraling to a point of no return, much like an ER doctor ensures that oxygen is circulating in a patient's body to keep it alive. Most criticism of central banking is akin to criticizing an ER doctor for helping the fat cells more than the heart muscles.
What was the last popular economics meme? Money printer go brrr?
> They're just supposed to make sure the money in the economy is circulating in a way that keeps it from spiraling to a point of no return, much like an ER doctor ensures that oxygen is circulating in a patient's body to keep it alive.
I don't think so. In the US, the current rate increases to control inflation are not a matter of life and death. The bankers are speculating they have an opening to reduce inflation by raising rates with minimal negative side effects. They're pushing toward an ideal (or at least up a believed gradient), not saving us from Armageddon.
I'm not strictly talking about humorous memes like "brrrrr". I mean there are a bunch of ideas that loosely resemble heterodox economics except they're even less sensible. For example:
- The only "real money" is gold/crypto
- "Wtf happened in 1971?" is basically advertising the return of the gold standard.
On the other side, you have memes that justify free money and loan forgiveness like:
-Debt is just make believe that can simply be wiped out with the stroke of a pen with little consequence
- TARP bailouts were handouts to the rich, so we deserve them too
>They're pushing toward an ideal, not saving us from Armageddon.
Most people aren't criticizing the interest rate hikes. They primarily criticize things like quantitative easing and bailouts do prevent economic collapse.
Life is full of fascinating but ultimately misleading coincidences.
Nobody remembers that the gold standard used to be viewed as a "cross" on which poor farmers were crucified, hence we needed to massively expand the money supply with silver.
Yes, in addition to demonstrating the weakness of mono-causal explanations it's also a good use case for Chesterton's Fence. We moved away from the gold standard for a lot of reasons. For example, as bad as inflation can be deflation is unquestionably worse. And we haven't had any major shocks to the economy that are anywhere near as severe as the depressions that were experienced prior to ditching the gold standard. This could just be good fortune, but you at least have to consider it when deciding if you want to go back to hard money.
One of the more memorable ah-ha moments or me in college was embarrassingly simple: my IPE professor leaned against the desk while the class was discussing something, and quietly asked, "why have an economy?"
"why have economics" makes a better question.
it being a made up field, with terrible history of accuracy, poor reasoning, virtually no way to replicate and test theories, interests only those that participate (willingly, out of curiosity or due to poor career choices) in that field of pseudo-science.
Why have it at all tho? Politics.
https://en.wikipedia.org/wiki/Economy
http://www.websters1913.com/words/Economy
(chiefly sense 2 on that second one)
The question makes sense using either of those sources for one's understanding of the term.
It looks like math, feels like philosophy, and the aftertaste is one of bitter selfish persuasion.
That goal is always primarily to increase the power and influence of the society (crudely GDP growth) because those that don't direct most energy towards this goal eventually end up getting out competed and supplanted by those external societies that do.
https://www.khanacademy.org/economics-finance-domain/macroec...
Salman Khan, its founder, used to be a hedge fund analyst.
I won't read hundreds of pages of dry economics any time soon. But maybe the books recommended in the article would be useful as a reference.
> Money Creation in the Modern Economy. By Michael McLeay, Amar Radia and Ryland Thomas of the Bank’s Monetary Analysis Directorate. Bank of England Quarterly Bulletin. Q1, 2014.
> https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-in-the-modern-economy-an-introductionhttps://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
I've found that reading more usually leads to more productive conversations with my financial advisor. (before folks come out of the wood-work to tell me I'm getting fleeced, the advisor is a family friend - I hold all of my investments with an online broker not the advisor)
This doesn't seem to work for a dollar bill in my hand though?
But yes, products can sometimes become accidental foreign currencies when they satisfy all the key properties, even if they’re not printed by a national bank. Casino chips for example. Disney dollars. Etc.
> a hundred years ago it would have been a promise to pay you ~1/20 oz of gold.
so 100 years ago, it represented a debt of 1/20 oz of gold.
"This bill is legal tender for all debts"
Makes it pretty clear to me.
The moment when bills become money in meaningful sense is when they end up in circulation. And they end up in circulation, when - you guessed it - central bank lends them to banks. The bills are a liability of a central bank, thus they are a note which says that central bank owes that amount to holder, thus they are debt. Yep, I agree, this is confusing and requires very careful thinking.
Pre-1971 it was a claim on a defined amount of precious metals. Historically, precious metals and specifically gold were the sole non-debt currency, because it's a dense store of value whose custody you don't necessarily have to entrust to a 3d person.
In programming lingo I like to think about money as something akin to promises or futures. Something that 'has value' strictly in its current context, and even then only as a 'promise' that will yield when exchanged. With the property that the longer you have it, the less it will yield. Which is a necessary condition for the currency underpinning your economy, to force people to move it around instead of holding.
When you look at it this way, getting rid of any excess I don't immediately need by getting something else (stocks, ETFs, property, whatever) seems like a total no-brainer.
* The dictionary gives me "debt (n): a sum of money that is owed or due". To define (or even describe) money in general as debt with this definition is obviously circular.
* If you simply define "debt" as "money" then to define "money" as "debt" is obviously even more directly circular.
The point being made isn't really wrong or unhelpful. As you say, a person's bank account is a liability of the bank, so to say "I have money in a bank acccount" really means "the bank has an obligation to me", and a lot of "money" is like this. Not all, though: cash and bank reserves can't (in the modern world) accurately be described as debt in the sense of "somebody owing somebody money" (and it's debatable whether even an individual bank account is fully describable that way).
There is no easy, trivial definition of what money is. Probably the most general view is that it represents some sort of obligation or claim the person who "has the money" holds over others. That's a valid insight, but it's too general to be a definition as it's also satisfied by many things we don't generally think of as money, eg. train tickets or stocks.
The "money is debt" notion is, I think, an attempt to express this useful-but-too-general "claim or obligation" idea, but given people usually think of "debt" in a much more specific sense as "money owed" I don't think it's terribly helpful for people who are struggling with what money "is". At best, I think it would have to come with a lot more explanation of exactly what is meant by "debt" in this context, and would need caveats to avoid being overly broad.
[1] Obviously, there are knifes made not from steel, but I hope you get the point anyway.
I think more fundamentally, money is simply the capacity for goods and services to be exchanged between humans. Anything that facilitates a trade can be considered money. Just like how in physics, the best general definition we have of "energy" is simply the innate capacity for change in the universe.
If I stumble upon a gold bar in the forest, that's not a debt. It does, however, have the potential to get me what I want. I could, in theory, turn it into a debt, or I could just spend it immediately on a bunch of cows.
1. The definition differs significantly from what people usually call money. Gold bar is a gold bar, not money.
2. It makes anything money. I can barter a basket of apples to a fish -> apples are money. That makes it difficult to create useful and interesting observations about the thing we usually call money.
I think my definition is quite fundamental, and holds true all the way back to the beginnings of finance. We used to just trade directly - trading horses for maize, etc.
But then humans realized that having anything be money is inefficient, so we invented currency as a locally acceptable surrogate for whatever humans value. But it's still rooted in humans exchanging goods and services they find valuable, for whatever reasons.
A way to look at the problem, is to realize that what matters is the ability to make humans do something. ( I won't expand on why that matters). From there, the other observation is you can probably reduce the reasons humans act to a few affections like fear... desire ( and a couple of others).
I am not trying to explain why we should decompose things this way nor prove anything, just doing a quick exposition. Think of those affections as analoguous to physics fundamental forces.
Having said that, here is a couple of interesting things. Those primal affections work often together but are not the same. They differ in the kind of social relationships they establish between humans.
Crucially in that framework, debt is not money. It can be used to bootstrap money, but it does not establish the same relationship.
When I say money is a desire accumulator it means that having acquired it, I can rest assured that people will desire my money, and will do things out of their own "free will" to take it from me. That gives me leverage (The sentiment of free will is important for it to work, and correlates with the desire emotion).
The accumulator part is important because it allows to build an economy of desire, to transfer it over time , space and to mix it with other fundamental forces to great effects.
I am not sure what I wrote makes sense without a lot of background presentation but feel free to probe it !
The idea of money as debt is really around taxes. You need to pay your taxes in money issued by the country you live in. Let’s take a New Country (NC) with a Government called NCG with a currency called Token.
At the start of the year NCG created some Tokens and at the end of the year citizens of NC need to have Tokens to pay taxes with, but why would the NCG accept stuff it just created from thin air as having value? And the answer is before people pay taxes NCG can buy stuff using Tokens by saying people are going to want to eventually pay taxes with these so they aren’t just pieces of paper they are IOU’s Aka Money. So at the end of the year when people are paying the government of NCG formerly imaginary Tokens what they are essentially doing is cashing in IOU’s from the NCG.
Of course the idea of these Tokens having value takes on a life of it’s own, much like how Bitcoins can be perceived as valuable when they don’t actually do anything. But if a country fails it’s currency quickly becomes worthless.
Forget about NCG. Suppose you move somewhere without any government. Heinlein ran through this example as a thought experiment in _Time Enough for Love_. You open up a general store. Nobody has any money to pay you, so whenever someone wants to buy something, they have to trade something. You can't set prices because there's no currency unit (numeraire) to set prices in. So what you do is you offer to let people buy things on credit, knowing that they will later have stuff to trade you to satisfy the debt. All this requires is a book to track debts. That leaves you having to haggle at time of repayment what that thing in the past they bought was worth, in terms of what they have to trade for it now.
So, you as the owner print up "notes" and give them out to people, typically for larger projects, with contractual promise of repayment later. These can be called loans. They don't have to be for projects, though. You could give everyone some "notes" every month and keep track in a ledger that they owe you that back with interest, or maybe no interest if you think people using your notes will give you an advantage over your competition, the general store in the next valley over that everyone is sick of bartering with. Whatever the reason for handing out these "notes", you can then set all your prices in terms of the numeraire on these "notes" you hand out, so the person you loaned money to can buy stuff from you. The people you loan to can also buy stuff from other people using these "notes" as long as those other people also want to buy stuff from your general store.
Maybe the loanee starts up a farm with the loan. As the farm produces food, they sell the food to other people, and maybe they accept the "notes" back as payment for the food. The loanee can use the "notes" they received from the food they sold to pay back their debt to your general store. With interest, of course.
Trying to balance money supply with economic activity — and only the activity of people willing to use that type of money — is a challenge in such a small economy like that, with privately-issued currency. However, no taxes are necessary.
Essentially the company pays it’s employee an IOU Token that can be redeemed at the company store or for housing etc. In this case it’s the willingness to trade goods for these tokens that give them value rather than Taxes, but it’s the same deal. After the value has been established people are willing to take out loans in script etc. But just like your example the company doesn’t inherently value having script just maintaining the illusion that script is worth something.
Money is the token used to repay the debt, but the token is created because someone else has gone into debt. They in turn will need to obtain money which is the debt of someone else somewhere up the chain. (Even if it's bank reserves and cash, in well functioning modern economies they're injected by the central bank monetising existing debt, usually government debt.)
It's probably more strictly true to say that having money is the credit extended in the credit/debt relationship, but they're two sides of the same coin.
This is liable to be debated: but for example, gold is pretty worthless and the mechanism by which it was appraised as valuable, at least the explanation I find to be the most compelling, is the Chartalist position. Wherein the government issues the currency, but demands it back in the same currency units as tax. Otherwise, gold is sort of just a social status luxury good which you pay a lot of money for but is worthless in any other context. Prior to currency you could pay tax in various commodities or as corvée labor - it does however indicate an intrinsic and continuous debt to the state.
Now if we look at the anthropological record the pretensions that people were bartering before the advent of currency disappears, and it appears that it was actually a system of credit/debt - of favors within a community. And that's where the issue arose. How do you guarantee an extension to a foreign party? A traveler or a soldier? And that appears to be when barter was deployed. I think this is an important aside here because it really does underline what money was intended for a guarantee. Of course there are other aspects like portability and storage that also contribute to the nicety of currency.
Finally to the point, China was actually the first known culture and eventually nation to have deployed fiat currency, and it emerged from credit-derived checks. Those debts were transferred from one person to the next informally.
"Tallies weren’t just used for loans, but for any sort of contract—which is why early paper contracts also had to be cut in half and one half kept by each party. With paper contracts, there was a definite tendency for the creditor’s half to function as an IOU and thus become transferable. By 806 AD, for instance, right around the apogee of Chinese Buddhism, merchants moving tea over long distances from the far south of the country and officials transporting tax payments to the capital, all of them concerned with the dangers of carrying bullion over long distances, began to deposit their money with bankers in the capital and devised a system of promissory notes. They were called “Flying Cash,” also divided in half, like tallies, and redeemable for cash in their branches in the provinces. They quickly started passing from hand to hand and operated something like currency. The government first tried to forbid their use, then a year or two later—and this became a familiar pattern in China—when it realized that it could not suppress them, switched gears and established a bureau empowered to issue such notes themselves."[0],[1]
[0] Debt: The First 5,000 Years, David Graeber
When you obtain a loan from the bank, you are conveniently paying back in the form of fiat currency, which you have earned through your labour. But if you fail to meet the payments, then the real debt emerges - the collatoral (your house, car, etc).
In this sense "debt" is just reinterpreted as "owing an agreed resource" which, for the most part, is conveniently valued in USD/EUR/etc.
The short film "Money as debt" was the eye-opener for me. It's probably still available on youtube somewhere. I urge anyone looking for a light-hearted, but apparently factual, introduction to start there.
In the modern economy where commercial banks create deposits through loans, the borrowers don't owe anyone money other than the interest payments on the loan, paying the loan destroys the deposits that were created through the debt. The borrower owes products and services, not money, to the holder of the liquid claim on that debt. The borrower gives up his products and services willingly because he must pay his debt with money.
I guess different people think differently, but when I find myself tied in knots trying to think about interest rates, inflation and the banking system, I find it helpful to remember that money is an asset, and is subject to the same basic principles (eg, supply and demand) as any other asset. Of course, it's really just the other side of the same coin - money is an asset to one person and a liability to another.
In other words, your money is someone else's debt.
There was a time when a whole lot of money was literally in the form of gold and silver coins. Explain to me how a physical gold coin in my hand is literally debt?
Explain to me how bitcoin is literally debt?
And, you don't get to claim that those are exceptions. You said that all money is literally debt. I'm pretty sure that claim is simply false.
With Bitcoin it is quite obvious. The strange part is that these assets have no corresponding liabilities, nobody has to accept them. The best you can do is speculate that people will accept them in the future.
Bitcoin is a literally a distributed ledger, so it's very much debt.
Gold and silver aren't strictly debt because they also happen to be commodities that were used for their aesthetic properties. However, it's use as money is a system of keeping track of credits and debts.
And, can you explain, if a bitcoin is debt, to whom is the debt owed?
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
When a bank considers giving a loan, can it model where the money would/might be eventually transferred to - whether it would stay on the bank's books and thus require less liquidity to cover net outflows?
I have the impression that central banks try to model national economies via "flows between large groups of actors", do commercial banks analyze/simulate this too on a (smaller) scale, to find out how not only money flows between them and other banks, but within itself too? Since accurate models would result in more profitability, is it safe to assume that banks have the best economic "world model"?
When I buy groceries, I have no idea where the money ends up even in the next "step", maybe banks attempt full "network simulations"?
Regarding the cooperation/net flows, wouldn't a more "symmetric" banking system be able to create more credit? https://github.com/void4/notes/issues/73
I wonder if a survey about this has ever been done, but I suspect only a very small percentage of people really realise that banks, private banks, simply create the money they loan you themselves, as they wish.
Reminds me of that quote: "if the average man realised how our banks work, there would be revolution in the streets tomorrow".
What is the concrete problem that this system creates in your opinion?
Second, this creates a class privilege: while banks can create money at will (and profit from it) as long as they stay within the confines of the regulations, ordinary families and individuals have no such power. There is no mechanism whereby ordinary people and families can do something equivalent to free leveraging through money creation, given similar capital/reserve minimums rules as banks have. Unlike a bank, a person with 10k$ cash on hand cannot credit themselves 100k$ (or 200k$ or 500k$) of money and use it as they please, to spend or to invest. In fact they have to go through the very same middlemen who do *have that kind of power, and which do use that mechanism to credit themselves the money that they will lend you for interest*. This doesn't strike me as fair.
The problem in 2008 was subprime loans that should never have been allowed, it wasn’t that banks could create enough money. Inflation after Covid was caused by central banks, not private ones, and it was done on purpose to avoid a recession. I don’t think these things are inevitable consequences of private banks creating money.
> Second, this creates a class privilege: while banks can create money at will (and profit from it) as long as they stay within the confines of the regulations, ordinary families and individuals have no such power.
Banks are given that privilege in exchange for being regulated to hell. They get a kind of monopoly over these profits in exchange for doing things like being forced to bank everyone, including unprofitable customers. Without this incentive, who would do the banks’ job?
The fed still has other requirements for use of their facilities and every bank that lends money is covered by a wide swath of regulators that have their own asset to liability and loan makeup requirements.
But the reason most countries no longer have reserve ratios is because these ratios have been replaced with capital requirements, which likewise constrain bank lending activity. Apparently some people didn't get the memo though, and think banks are now unregulated and can do whatever they want. In reality the banking sector is one of the most regulated industries, and for a good reason.
Similarly, if you go look at the M1 money supply chart you see that vertical line. The average person goes "WTH!!" and they are told "The vertical line is where we changed how the M1 is calculated" and the average person goes back to sleep. But even a middle schooler knows you can't just arbitrarily change how the Y axis is calculated mid-stream. It makes the chart useless. They could have back-filled with the new way of calculating or forward-calculated with the old way for some period of time. The chart is useless on purpose. It's friction between an average viewer and understanding what happened in the economy. And only "weirdos" and "conspiracy theorists" bother to overcome the friction to try to figure out what goes on.
But it's not 'as they wish' as you say, depending on where they operate, they are typically constrained by capital and liquidity ratios set by their regulator.
I feel like I have a pretty solid grasp on the operational mechanics of money creation, but I don’t for capitalization. The whole thing seems a little dippy though. For example isn’t the Fed “capitalized” by its largest borrower, the Treasury?
All that being said I doubt loan officers check their capitalization ratio before originating a profitable loan to a creditworthy borrower. I imagine another department checks the ratios from time to time and sells or resells loans for cash or stocks to increase the capitalization ratio as needed. I’d love to hear from someone who actually handles this.
But a better alternative? Well, cryptocoins are not exactly simple either(despite their other flaws). And most other concepts I have heard of, are hellish in the details, too.
In part, I think that is why so many criticize it.
In terms of details, Bitcoin is straightforward. It can be boiled down to: instead of obscuring the system we use globally for exchanging value—leaving it prone to manipulation and corruption—Bitcoin makes this system trustless (meaning you don't have to take someone's word for it), transparent, and accessible to anyone, without limits, allowing them to transact globally.
The reason most ignore Bitcoin is because the very people that run the existing system have the ability to push propaganda against it. The two favorites being:
1. It's bad for the climate (ignoring the existing system's required infrastructure which makes Bitcoin look like a hippie commune).
2. It doesn't have enough transaction capacity (ignoring or being oblivious to the Lightning Network/off-chain settlement).
There is no technical reason that Bitcoin can't work; it's purely a problem of perception and operant conditioning.
What don't you understand?
And I could not explain the concept of cryptocoins to children either. Nor adults actually, unless they have a background in math.
I mean the concept of the blockchain, allright. Even people who do not know cryptoalgorithms can get it. But mining coins? You can mine gold, that is understandable, but mining numbers? How do you explain that in simple terms?
Similar to how mining for gold requires repeated strikes of a pick to reveal nuggets of gold, "mining for Bitcoin" requires repeated attempts to guess a random number (strikes of a pick) which has a shifting difficulty due to how many miners are trying to do the same thing (not unlike an increased difficulty of finding gold when there are multiple miners prospecting in the area).
Assuming you didn't trade for/buy it off of someone, having a Bitcoin is analogous to having a gold nugget in that it proves you did the work (proof of work) to get it (picked at rocks, or, expended the necessary computation cycles to guess the correct number/nonce).
Edit: Just like the amount of gold in the world is dictated by how much has been mined, the same analogy plays out for Bitcoin. The only difference is that the maximum amount of Bitcoin that can be mined is known and enforced algorithmically whereas physical gold is a guess/estimate.
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In terms of explaining it to others, they don't need to understand all of the technicals to "get it." People don't understand (technically) how their iPhone works but they "get it" and are able to use it.
It is really not analogus. A gold nugget is something material, with a practical value. You can make electronics or jewelry out if it.
But some random "mined" numbers? Why do they have value? They don't. Unless others accept their arbitary value. Which to me is not much different, than fiat money.
It somewhat works, if people accept the weirdness of the concept, but a intuitive understanding of value, like with gold, I cannot see.
The random mined numbers are not where the value is stored. Those numbers just confirm that the miner who finds/guesses that number did the necessary work to find it, and in turn, validate the authenticity of the current block of transactions. Their reward being Bitcoin for doing the work (how Bitcoin comes into existence).
That Bitcoin has value because it represents energy or work expended, just like any currency—dollars, vodka, whatever. That's the whole reason any currency exists: as a medium to trade value generated by one person's work for the results of other people's work. Instead of physical labor, though, the work being done is computation.
It also has value because of how the underlying system that backs it works. In fiat systems, the rules about how much money is in existence, who can or cannot access the system, and the ability to accumulate savings is dictated by a central authority. With Bitcoin, there is no central authority. The amount of Bitcoin produced cannot be changed without fundamental changes to its halving algorithm which would result in a fork of the network, creating a brand new currency (with the original network continuing on uninterrupted by people who disagree with the new rules).
This is another reason Bitcoin is valuable: everything is driven algorithmically by consensus, meaning, humans can't alter it on a whim (like a fiat system). Instead, the only way to make a change is to propose it in the form of a code patch and then have the rest of the network accept that change. If the network doesn't accept it, the change doesn't occur. In terms of money, there's never been a more valuable form (there is no analog for a form of money that doesn't require human trust—Bitcoin is unique in that category).
Beyond that, it also has value because it's digital and permisionless. I don't have to get a bank's permission to do business or transact with someone else. I can just _do it_. And I can do that on a global scale, instantly. Contrast that with the existing system, any amount over a few thousand dollars triggers red flags, transactions get blocked, and insane amounts of time and energy get wasted just for you to get access to your money (that most people don't view that as patently insane proves how well the conditioning works).
Even further, Bitcoin isn't something that can be confiscated (like fiat, precious metals, or other assets). This means that corrupt governments and individuals can't just blindly steal from you. The only way to get your Bitcoin is to get access to your private keys. The only way to get those is, ultimately, by force/violence (i.e., they can't just dip their hand into your bank account and clean you out because of a "law" they invented). And that only works if your private keys are accessible—though difficult, you could memorize them creating the ultimate security system.
The best part and why Bitcoin is extremely valuable: its base cannot be inflated. Meaning, when I work and earn money, that money either retains its current value, or, increases in value. There's no potential for a government to randomly print off trillions on a whim and devalue the money I've already earned (essentially, stealing my life from me covertly).
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All of the above is radically different from fiat money. Again, we've never had a currency like Bitcoin in the history of humanity (in part, why it's so difficult for people to understand it). It's like showing fire to cavemen.
There is RAI which is an algorithmic stablecoin on Ethereum which fails to scale.
I can imagine a world where in 10 years people figured out how to build a price level targeting cryptocurrency with neither inflation nor deflation on a platform which is fast enough to process every day payments and which people in developing countries adopt to minimize volatility and avoid inflation in their national currency.
Those days are far into the future and they have absolutely nothing, nothing to do with Bitcoin. Maybe Ethereum if they solve the scalability problems. Maybe Solana if they build a RAI inspired stablecoin. Maybe a completely different platform but certainly not Bitcoin.
Okay! Then why don't families and individuals have an equivalent mechanism? Set capital and liquidity ratios by law. E.g.: if you have 10k$ on hand, you can create 100k$ of liabilities. If you have 10k$ on hand and 50$k in medium-risk investments, you can create 300k$ of liabilities, and buy a house that way. Something along those lines.
Of course, since ordinary people can't do that, they need to go to middlemen: the very banks who can do that x) Doesn't strike me as very fair.
As soon as you start taking other people's money you are subject to a ton of regulations for limiting fraud. In the above example if you took the funds and bought a house you'd be potentially guilty of fraud.
I for one did not realize that. I thought that was what the single nation's central bank does. If strictly true, how does anything work, I. E. Why would they not just create money ad infinitum? I imagine there are crucial, critical details to that "simply".
More or less.
What people tend to forget is banks are just "middlemen" - they are a mechanism to facilitate trade and not much else.
2. What value or service does this middleman provide? Why can't businesses and families and individuals get money by crediting themselves the money and creating a matching liability? This is what banks do.
2. Mostly pensions and pension funds - saving work now for payments later when you can't work - see 1.
2a. Additionally funding large projects which no one individual/institution can afford no matter how wealthy, such as building huge infrastructure projects like silk road and other national infrastructure. See 1.
Northern Ireland and Scotland do this too, but there it's kind of obfuscated by both being interchangeable with the British pound, while the HKD stands alone.
"This description of the relationship between monetary policy and money differs from the description in many introductory textbooks, where central banks determine the quantity of broad money via a ‘money multiplier’ by actively varying the quantity of reserves.(3) In that view, central banks implement monetary policy by choosing the quantity of reserves. And, because there is assumed to be a stable ratio of broad money to base money, these reserves are then ‘multiplied up’ to a much greater change in bank deposits as banks increase lending and deposits. Neither step in that story represents an accurate description of the relationship between money and monetary policy in the modern economy. Central banks do not typically choose a quantity of reserves to bring about the desired short-term interest rate.(4) Rather, they focus on prices — setting interest rates.(5)"
Does that mean the whole "Fractional Reserve Banking" explanation is not how it works?
Banks would always have tracked accounts via ledgers though, it's just that before fiat currencies they had reserve requirements in place to ensure banks kept enough currency on hand to handle day to day withdrawals.
https://www.investopedia.com/terms/f/fractionalreservebankin...
Genuinely curious!
But the Bank of England explanation is a lot better.
> This is not how money is actually created but only a way to represent the possible impact of the fractional reserve system on the money supply. As such, while is useful for economics professors, it is generally regarded as an oversimplification by policymakers.
And from the Bank of England's (very good) primer on money creation:
> Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits.
> ...
> Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits
The "money multiplier" concept of FRB is a useful model in the same sense that modelling an atom as if it were like a solar system with a solid nucleus with electrons whizzing around it like planets i.e. not really 'true' but a useful-enough approximation for many use cases.
The BoE primer explains all of this very clearly on the first couple of pages, it's well worth reading:
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
Then there is the accounting system the Federal Reserve uses: FAM: https://www.federalreserve.gov/aboutthefed/financial-account...
"The bank must settle the transaction with the vendor’s bank using reserves held at the central bank. If the borrower never repays the loan, then the bank’s reserves will not be replenished, reducing its ability to lend further."
If a borrower never repays a loan, then the bank's capital is reduced (on the other side of the balance sheet from reserves) and the bank has to obtain more capital (by persuading those holding created deposits to swap them for bank bonds or shares) to maintain their risk capital ratios.
Reserves have absolutely nothing to do with settling transactions. They are an optimisation of the actual process - some other entity in the banking system must take the place of the depositor in the source bank if a cross bank payment is to be made.
International transactions via correspondent banking don't use reserves. They use direct bank to bank mirror transactions.
It would be far better if we forgot about reserves altogether [0]. They weren't even a thing in the UK until 2005.
[0]: http://www.bondeconomics.com/2022/09/bank-reserves-demystifi...
Is this different from setting the maximum risk to capital ratio to infinity?
If not, won't we have worse cycles of mania and panic? And what would stop banks from eating the world, through unfettered debt creation?
Capital requirements (usually something like "a minimum of 10% of the bank's balance sheet has to be funded by equity or deferrable bonds") are far more important to a bank than reserve requirements:
- if bank capital is too high, return-on-equity is lower for a given amount of profit. Hence shareholders don't want too-high capital
- if bank capital is too low (from too many non-performing loans) then the bank will need recapitalisation which is expensive and bad for shareholders, and if it can't get that, it will be wiped out (either lose its licence or get bought out/nationalised/gutted)
So banks are incentivised to not create debt that is too-risky -- i.e. where the ratio of potential non-performing loans is too high for the interest rate they lend at, or the interest rate of raising expensive additional capital would get too high...
Reserve requirements are about liquidity (bank runs) rather than about solvency - but if bank capital can be ensured to be positive and the bank remains solvent, bank runs are much less likely in the first place, and liquidity provision and bailouts to avoid bank runs won't incur losses for the rescuing entities.
Thereoretically yes. However, 2008 moral hazard (heads I win, tails you lose) of excessive mortgage lending and securitisation put paid to that notion. Staff of bailed out banks were getting their bonuses again in 2009[1].
It also touches on the principal/agent problem, where bank executives and traders don't really care if the shareholders get wiped out and the taxpayer picks up the tab. They'll get their bonus and bounce to the next opportunity if the bank itself goes belly up.
Additionally, the Justice Department refused to bring criminal charges against bank exectutives[2].
So, you'll load up on risk to make excess short term profit, maybe your bank will go bust, but you'll never face charges and may get a nice bonus next year at your bank, or bounce to the next bank. Must be nice.
[1] https://abcnews.go.com/Business/story?id=8214818&page=1
[2] https://www.newyorker.com/news/john-cassidy/didnt-eric-holde...
Ahahaha, funny stuff. Actually what happens is money is pooled from non-owning taxpayers and used to recapitalise with no strings attached.
Ammous is (to put it mildly) an ultra-contrarian on a variety of subjects -- central banking, money, and even climate change -- that he has no actual scientific training in.
He claims Bitcoin should replace central banking and that Bitcoin is a hedge against inflation. He doesn't bother to counter the argument that these are opposing goals: a useful currency can't be deflationary.
He was also proven wrong about the whole "Bitcoin is a hedge against inflation" thing when it crashed along with every other speculative asset in the last few months.
If you're so thin-skinned that you think all criticism is an attempt at censorship, then perhaps the internet is not a safe space for you.
No one is saying, "Subscribe to only this small subset of opinions on [insert massive topic]." There are lots of interesting contrarians in macroeconomic theory.
What I'm actually saying is, "It's better not to waste time on the opinions of people with an explicit agenda, a poor understanding of the subject, and many beliefs that are easily refuted."
But if someone has time to spare, then by all means, go for it.
I think a more relevant comparison is learning how the economy works from a goldbug.
Also, what is it with economics that makes people so susceptible to these contrarian views that have been proven to be bullshit?
I'm not an expert in the field, but I've had an interest in it since I was a teenager. I've read books, I listen to podcasts, I've watched videos, I read the economist. I have an ok understanding of how things work. But I don't delude myself into thinking that I have anywhere near the required knowledge to actually hold a strong opinion on these matters. Yet, so many of these people are convinced that their opinions made up of fringe ideas from YouTube videos are the definitive truth.
He’s coming from a 150 year long tradition going through the great Ludwig von Mises back to Menger and the Marginal Revolution. Keynesianism was the wrong turn. It’s a failed school that’s now in its death throes, which is becoming more obvious by the day.
Note that this is within the very small subsection of the population that even has any interest in how central banking works.
Can we all agree at least that for something so fundamental as our central money supply, we do a pretty horrific job on making it clear and understandable - much less interesting?
Side note: Why the fuck would full employment be a goal of a central bank. Talk about paperclip optimization.
Agree it does not seem (at first glance) to be a reasonable policy goal for a bank, and further this mandate does not hold for all central banks. <edit> For example, the ECB does not have this mandate </edit>
However, some economists believe there is a relationship between % of population "employed" and inflation.
Employed in quotes because, well, see the other HN post today https://news.ycombinator.com/item?id=32738538 about the costs of caring for parents as an example of actions which create direct,large, partially measurable social benefit but don't count as 'employment'.
That is, ultimately, the main asset on the balance sheet of the nation and arguably the underlying denomination. Humans trade by exchanging labour hours with each other.
Can you explain how demanding full employment follows from that? I'm not seeing it.
It seems that by this logic, advances in fusion energy and AI which obliviate the need for 99.9% of humans to work at all would be seen as bad. I'd call that perverse.
And some things are just complicated and not that easy to understand. I often think that taking macro and/or micro 101 courses without getting to the 201 level does more damage than they're worth in understanding the field. They make people think they can confidently understand more than they should.
I hope things can get better in terms of general understanding of economics, otherwise it makes solving problems more difficult long-term.
"But the 1% of Americans who own 40% of all the assets just get tremendous gains before that first job is created for the middle class. And so these policies dramatically widen wealth inequality, they’ve just wrenched this gap between the very rich and everybody else, which is the defining economic dysfunction of our time.
To get back to your point, nobody thinks about that when they think about the Fed, because the Fed presents everything it does in this really clinical, hyper-technical language that obscures what they’re doing and obscures this facet of it. Part of that is from how dysfunctional the media conversation around this stuff is, and that’s what I was trying to get across in that scene with the Glenn Beck monologue."
[1] https://taibbi.substack.com/p/interview-christopher-leonard-...
https://www.goodreads.com/en/book/show/58485511-the-lords-of...
[1] https://taibbi.substack.com/p/interview-christopher-leonard-...
"A Look Back at the History of the Federal Reserve (2013)"
https://m.youtube.com/watch?v=5IHzAcKIRHw
Richmond Fed President Jeffrey M. Lacker discussed Federal Reserve history at Christopher Newport University on Aug. 29 in Newport News, Va.
> The agreements finally reached at the [1944] Bretton Woods conference ... invented the International Monetary Fund and, as a subsidiary institution, the International Bank for Reconstruction and Development (or World Bank). Finally, to eliminate rival forums that might be hostile to these objectives, they advocated the destruction of the Bank for International Settlements. But almost every element of this mosaic was subsequently undermined.
https://www.researchgate.net/publication/323947229_IMF_BIS_a...
> After the end of World War II.. during the Bretton Woods Conference it was decided to abolish the BIS “at the earliest possible moment,” because it was considered that the BIS would have no useful role to play once the newly created World Bank and International Monetary Fund were operational. European central bankers held a different opinion, and successfully lobbied for maintaining the BIS.
There are more people who would benefit from knowledge of the system than those for whom it makes sense to pursue those courses. The books suggested by the article are a good start. Anything focussing on Bretton-Woods is not.
You can have New Deal type infrastructure and public works projects in the existing system, or the government pumping asset prices by far more directly transferring money to the rich in a full-reserve banking "Positive Money" system. The only thing guaranteed by "positive money" is that it makes the supply of money a centralised political decision rather than a decentralised supply and demand based one, and makes retail banking even less friendly to the average person.
There is no guarantee of procedural stability year-to-year. Every crisis the way central banking works changes. Before & after 2008 central banks became different beasts, for example. They keep changing their methods. A published book can't keep up with that central banking 'is'.
Say "Bank of USA" emits physical and electronic dollars, then those dollars flow to Japan for some goods. Can the central bank look at every way those dollars went to Japan (some small part in physical way, much bigger part by moving through multiple clearing houses).
How does the central bank then trust the other central bank? "We received 1 billion in paper dollars and 100 billion in electronic transactions".
Also, how can "Bank A" from say Germany, trust "Bank B" from say some less reputable country that those underlying "electronic" dollars even exist? The settlement company supposedly checks this somehow, but how?
If "Bank B" moves 100 million to "Bank A", then were is that 100 million in a physical way, if all of that is just electronic money created via lending.
How can you know that the "Bank B" didnt just print 200M and use it to pay for something in Bank A. Among the same country, there is some central institution that looks on that (e.g. all banks in EU are audited by EU). But what about cross border transactions. How can you know that those 100M dollars paid to you are actual 100M dollars and not just some fake line? Does your bank have "anything" apart from a line in a database that said that you received 100M from the other bank? And also what is the incentive for the other bank to not "create" a bit money "on the side" to import stuff to your country.
Every time I try to search about any clearing houses I just land up on the "Clearstream scandal" wikipedia page. Same for the recent "naked short" theory, where you basically land on the articles about DTCC, but without any information "how the sausage is made".
To the list of books to read I'll humbly add:
"The Only Game in Town" by Mohamed El-Erian.
https://www.amazon.com/Only-Game-Town-Instability-Avoiding/d...
[0]: https://www.amazon.com/Central-Banking-101-Joseph-Wang/dp/09...
https://www.goodreads.com/book/show/15794201-modern-money-th...
https://www.amazon.com/Secrets-Temple-Federal-Reserve-Countr...
I enjoyed this textbook on the topic for a ground up explanation to a lay person.
https://www.amazon.com/Central-Banking-Sustaining-Financial-...
The Man Who Knew: The Life & Times of Alan Greenspan. By Sebastian Mallaby.
The Courage to Act: A Memoir of a Crisis and its Aftermath. By Ben Bernanke.
Lombard Street: A Description of the Money Market. By Walter Bagehot.
The Future of Money. By Eswar Prasad.
(The following two are mentioned at the end of the article)
“A Monetary History of the United States, 1867-1960” by Milton Friedman and Anna Schwartz.
“The Fed and Lehman Brothers: Setting the Record Straight on a Financial Disaster” by Lawrence Ball.
Avoiding communism and poverty, and the human misery, poverty and 6 and 7-figure death tolls that so often come with it is far more productive than getting a certain economic or policy lever "just right".
This is similar to health where avoiding things like smoking are more important than finding the perfect diet.
Robert understands how money works today, knows a ton about the banking system. Both him and Donald Trump are wealthy and successful, and besides getting rich quick has worked many times for many people (including many who use this site: the dotcom boom, crypto, NFTs, etc) — if you have no ability to figure out how to play certain games, that's another discussion.
If partnering with Trump isn't enough of a red flag, Robert has plenty of failed businesses on his record to prove how useless his mind is
Wasn't an advice, just stating the known fact that people got rich overnight on various things, e.g. NFT.
Most of the US was "partnered" with Trump for four years and it flourished, the economy was booming, the US did not get involved into a single new war during that time.
Most businesses fail, all businesses fail to some degree, it's not an indicator of how "useless" somebody's mind is, even if they make one out of 100 that succeeds, it's a success.
You're likely in your late teens / early 20s, convinced that you've figured out how the world works and everything looks crystal clear to you. That is not confidence, rather lack of data points, life experience, research. You dismiss things and try to discredit people without really understanding the topic and resort to personal attacks, that makes you look unstable and childish, I can't really take seriously things you say, the arguments you make, there's not much that can be done here from my side, as you seem to have already made up your mind about things, driven by fear, anger, and other basic emotions, rather than logic and reason. This topic was about understanding central banking, and continuing this discussion would be a waste of my time as to understand something, one must be able to accept and analyze different points of view, instead of calling people names.
You admire this guy Robert as a man who knows how to be successful under capitalism yet you also are comfortable that the only success he has had is baiting people like you into thinking that he is indeed successful.
Thinking that the economy flourished under Trump is sycophantic nonsense. He cut corporate tax rates to incredibly low levels and ordered the fed to cut interest rates despite the already out of control stock market, so of course indexes like the Fortune 500 skyrocketed. Not an indication of the real economy in any way or how the labor class is actually doing, but an indicator of growing CEO wealth and growing inequality
Marx's "labor theory of value" surely sounds great, but you have to know that that guy never worked a day in his life. He was a spoiled lazy brat who was sponsored by his friends until death, friends who had wealthy parents that owned factories and businesses (evil capitalists). Not an expert on labor.
As for Trump, the question here wasn't how he did it, it's the fact that he did it... the game is rigged, the money in today's world is just paper, it's one big ponzi scheme, and once again, it's the FED and Marxist central bank to blame for... he had to work with the tools he had, and he's done many great things for his country despite non-stop attacks from the left. The financial system we have today is very detached from actual labor. Despite him bringing a lot of manufacturing back into the country, those two will likely never ever become as connected as before due to automation and virtualization.
You seem to be attacking people rather than ideas, ignoring successes, and fight instead of trying to improve and create something. With that attitude you will be poor your whole life, and people who promise you equality, or blame capitalists/men/racism/etc just want to steal the rest of your money from you. Humans have a natural tendency to compete. The fairness of things being unfair is how the world works, and no amount of surveillance, policing, or social credit scores will ever be able to change that.
Anyway, why are you so reflexively critical of the labor theory of value? Capitalism is leading to the overproduction of goods and the destruction of the environment, so why is that any better than considering a form of socialism?
The "labor theory of value" as you put it, sounds like a noble idea only until you try to implement it, the history has shown it many times, and yet gullible people with little life experience still keep falling for it. Socialism can work in a small town where everybody is like a family, the larger the scale the more corruption and less trust ends up being part of the system, and it just turns into Venezuela or USSR with tyrannical govt and everybody stealing what they can. Free market is how things work in nature, cruel but it works. I've never said that I view capitalism as ideal or the best way of doing things, no system is perfect. And today you don't see much of it in the western world anyway, it's mostly aspects of kleptocracy that get falsely blamed on supposed faults of capitalism.
It is better because it works and grants the most amount of personal liberties to express yourself and live your life, pursue endeavors and invent new things. Overproduction of goods is somewhat better than underproduction (empty shelves), you're about to be able to compare the two if you live in the EU or US.
And as a side note, I find it beyond hilarious that people like you use inventions and devices that were created in many aspects thanks to capitalism, and then try to convince everybody that it's bad, on a website of a company that puts seed capital into startups (evil capitalism again!). You guys should just leave for Venezuela, and live your life there, enjoying socialism away from this terrible system that overproduces things and ruins the environment.
My description doesn’t do it justice. It really is a thorough and informative podcast.
I remember hearing Jeffrey Snider explain all this stuff, and I had to listen more than once just to grok it all.
Very educational.
Free to listen here: https://www.macrovoices.com/edu
Please, no. The author has a very loose attachment to reality:
> In his book World Without Cancer, he argued in favor of a pseudo-scientific theory that asserted cancer to be a nutritional deficiency curable by consuming amygdalin.[1][2][3] He is the author of The Creature from Jekyll Island (1994),[1] which advances debunked conspiracy theories[4] about the Federal Reserve System. He is an HIV/AIDS denialist, supports the 9/11 Truth movement, and supports the specific John F. Kennedy assassination conspiracy theory that Oswald was not the assassin.[1] He also believes that the Biblical Noah's Ark is located at the Durupınar site in Turkey.[5]
This channel just points to doomsday of the central banking fund. I am curious on the counter point people can put against the prediction they are giving out.
The way I see that is, it is a dangerous utopia (same grade than the soviet utopia) to think that currencies will flow well enough to give all households a decent living, and that only based on the "supply and demand" rule. Actually, that would be madness.
What people tend to forget about currency systems: it is a set of rules made by human beings, enforced by human beings, certainly not a force of mother nature. It seems those human beings are very discret and very few, but their networks seem complex (a good start is the blackrock and vanguard funds which drive much tech industry via "their" directors).
In "tech", those currency systems are extremely toxic, and they push this toxicity upon nearly the entire world: planned obsolescence and Rube Goldberg Machines (network protocols and software mostly). Why? Because, huge parts of the tech industry cannot justify __fairly__ a sustained activity. Then, rotten people do setup those previously cited "tech" scams.
This is accute toxicity for the entire world. That is expected to be strongely regulated... which will bring its own set of issues, but on the overall I believe we'll get much less toxicity... because the current state is just... omg.
Using deposits as loans is fraud, and has been recognized as fraud for a long time, until governments (and banks!) realized that if they worked together they could hide the fraud until it wasn't a problem for the people doing the fraud anymore.
Fractional reserve banking is actually "fraudulent misappropriation of deposits", and in roman times, if someone's bank failed, the only way it could fail would be if illegal stuff was going on, so the banker had 1 year to make their customers whole, and if they didn't, they were beheaded in front of their banking table.
(most of them would generally skip town rather than be beheaded, but it's a nice public signal about how the world feels about fraudulent banking practices)
In the modern world, when someone's bank fails, they gaslight the rest of us by publishing _another_ book about how they didn't see it coming...
https://mises.org/library/money-bank-credit-and-economic-cyc...
Money is created simply by banks making a ledger entry (an asset and a balancing liability). Nothing more needed.
Wish I had a great paper for you on this, I have seen some but blanking at the moment. Maybe a likeminded HN colleague can help out
Edit: here is a decent start https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
I linked to a book that explains it in great depth, not that I would expect anyone to read it.
_real_ money is backed by _real_ things. What banks create when they make a ledger entry that creates new money isn't "real" money. It's fake money, but because of the fungible nature of money, their fake money gets mixed in with real money, growing the purchasing power of those who get it at the expense of reduced purchasing power of everyone else who has dollars.
THAT ALL SAID!
I appreciate the engagement, and my god if you wanna hash this out more I'd love a zoom call to see where we'd find "a failure to disagree". I suspect we'd agree on most things.
BTW, love your username. I rode a moped from Denver to BC to Vancouver to Seattle and back, a few weeks ago, and of the 20+ days I was gone, spent 12 of them hammock camping.
I love hammocks. They're perfect, in many situations.
This is not true, and it hasn't been for a long time. Even the idea of 'real' money is nonsense. Money is symbolic.
Read something by Moser for a description of how money now works.
I'm not sure there is a more real thing than another person's labor, which is what people offer when they sign a debt contract. The way fiat works is effectively a time banking network with abstract currency units.
>Banks first decide how much to lend depending on the profitable lending opportunities available to them — which will, crucially, depend on the interest rate set by the Bank of England. It is these lending decisions that determine how many bank deposits are created by the banking system. The amount of bank deposits in turn influences how much central bank money banks want to hold in reserve (to meet withdrawals by the public, make payments to other banks, or meet regulatory liquidity requirements), which is then, in normal times, supplied on demand by the Bank of England.
Anyway, the reality is people don't want the constraints of denominated money because it's not flexible enough for human desires.
Credit has roots in non-exact social contract that predate banking forever, so the concept of borrowing, interest etc... are as you point out old. The fact that Islamic traders in 600AD decided to not charge interest is totally irrelevant to modern monetary theory
And that's what I find is the difference in how people view these issues, do you look forward to how we can use existing and new methods for exchange? Or do you look backwards and try to re-create a previous system?
I've never seen the second strategy actually work because people reject it.
It is called a bigger economy. A bigger economy needs more money and the money has to be given to the new comers that created new wealth rather than to those who didn't.
Imagine building a highly advanced society on the division of labor and trade between people. No single person can do everything alone so by cooperation we will attain a much higher standard of living free of starvation. Now let's say the money system is exclusively digital and runs on the internet. If the internet were to shutdown and take down the money system with it, the standard of living would collapse. If people decide to no longer farm food for themselves, they would have to do so again, if they cannot start a farm, they will have to starve. All the things we take for granted would disappear.
Now, imagine a slightly different scenario, instead of the money system shutting down, all of the money concentrates in the hands of the 1%. For the bottom 99% the result is the same as if you shut the money system down for them. They would be doomed to poverty overnight. We call events like these economic "depressions".
The real world isn't black and white. There are different "grades" or there is a spectrum in how good money is at facilitating trade. The gold standard is worse at doing so than fiat but even modern fiat has problems and isn't perfect.