transcript

Speaker 1:
[00:06] A year ago, Brendan Greeley saw something on television that couldn't have been more up his alley.

Speaker 2:
[00:12] Have you seen this skit? Nate Bargatze was on Saturday Night Live, and he's playing George Washington.

Speaker 3:
[00:17] General Washington, we apologize.

Speaker 4:
[00:19] No need. I am fearful as well.

Speaker 1:
[00:22] Bargatze, as George Washington, is crossing the Delaware, like in the famous painting, and trying to inspire his men.

Speaker 4:
[00:28] But we will live through the battle ahead because we fight to control our own destiny. To create our own nation, and to do our own thing with the English language.

Speaker 1:
[00:45] He then details linguistic oddities his soldiers are fighting for, like the freedom to call cows and pigs beef and pork when they're dead, but for chickens to always just be chicken, and the privilege of having two ways to spell Jeff.

Speaker 5:
[01:01] What are the two ways to spell Jeff, sir?

Speaker 4:
[01:04] It's the short way with a J and the stupid way with a G.

Speaker 2:
[01:10] And so one of those lines is, he's like, and we will have our own currency, and it will be called the dollar.

Speaker 3:
[01:17] The dollar, sir?

Speaker 4:
[01:18] Yeah.

Speaker 2:
[01:19] One of the cast members goes, General, why will it be called the dollar?

Speaker 4:
[01:22] And he says, Nobody knows.

Speaker 1:
[01:26] And with that, Brendan's phone lit up. Because it isn't true that nobody knows why it's called the dollar.

Speaker 2:
[01:34] I got texts from people. They're like, wait a minute, I know a guy who knows.

Speaker 1:
[01:40] Brendan's been a finance reporter for 20 years. He covered the Federal Reserve for Bloomberg and the Financial Times, where he still writes a column. And a couple of years ago, an editor suggested to him that there might be a juicy book in a biography of the dollar.

Speaker 2:
[01:53] Literally someone said, do you want to write a book? And I was like, sure do. I'm definitely going to write a book. I can figure this out. And then I started to figure it out. And I realized how much I didn't know and how much I had to learn.

Speaker 1:
[02:04] All that learning ultimately went into his forthcoming book, The Almighty Dollar, 500 Years of the World's Most Powerful Money. In the course of writing it, he actually enrolled in a PhD program in economic history at Princeton. And he discovered that the history of the dollar was so much stranger than he'd realized, so much crazier and more complicated than he known when he was just a finance journalist.

Speaker 2:
[02:27] Now, like when I pick up a dollar bill, an actual physical dollar bill, I actually have these thoughts. I'm like, God, this is so weird.

Speaker 1:
[02:34] You weirded the dollar for yourself, basically.

Speaker 2:
[02:36] I did. I weirded the dollar for myself. And now I am weirding the dollar for everybody else. You're welcome.

Speaker 1:
[02:49] This is Decoder Ring. I'm Willa Paskin. There is nothing more common than money. It's everywhere. It influences just about everything. It's as close to being the air we breathe as anything that's not actually air. And yet this can obscure all the complex assumptions baked into it, all the historical forces that make it what it is, and make it behave the way that it does. It can obscure just how weird it is. But in this episode, we're going to try and show you, by drawing your attention to some strange things we don't really think about, even though it feels like we're thinking about money all the time. So today on Decoder Ring, two simple sounding questions. Why is our money called the dollar? And where are those dollars really coming from? So, Contra Saturday Night Live, there are people who know why the dollar is called the dollar, and Brendan Greeley is one of them. But like I said, he didn't learn it all the years he spent as a reporter, talking to economists.

Speaker 2:
[04:09] When I tried to do a history of the dollar, I found that the way economists thought about money wasn't useful to me, it wasn't helpful. Listen, not a knock on economist, I mean, it is a knock on economist, but every social science relies on simplifications, on models, on assumptions. And what I found was, for me, the assumptions that are inherent in economics didn't explain how money works.

Speaker 1:
[04:33] There are many such assumptions, but let's start with one, about how a country first creates its currency. The common idea is they just make it up.

Speaker 2:
[04:43] So if you were to declare the free state of Paskinlandia tomorrow, our assumption would be, well, in Paskinlandia, we pay each other in Willa's. That's the currency. I gave it a name. This is how it's going to work.

Speaker 1:
[04:59] If you're being highfalutin, you could call this idea monetary sovereignty. But the concept is not all that different from how it's portrayed in the Nate Bargatze sketch about George Washington. In 1776, we declared independence, created a new country, and our new country needed a new currency, and so we made the dollar. That's monetary sovereignty. Political independence equals monetary independence.

Speaker 2:
[05:25] America is an independent country. It declared its political sovereignty. In doing so, it automatically acquired monetary sovereignty. Alexander Hamilton was amazing. He came up with all sorts of amazing new laws, and we had the dollar, and that's where it went from there.

Speaker 1:
[05:40] That's definitely the story. I'm like, yeah, that's what I think happened. Is that what you thought happened?

Speaker 2:
[05:45] Yes, of course, that's what I thought happened. That is not what happened.

Speaker 1:
[05:51] So what did happen then?

Speaker 2:
[05:54] Okay, so we have correspondents from Jefferson, from Hamilton, talking about a monetary system. And Jefferson at one point says, it makes sense to use the money that is already the most familiar. The dollar wasn't an invention. It was not a creation of the United States. They were adopting something that already existed.

Speaker 1:
[06:16] So the dollar didn't start with America. Instead, the dollar began a couple hundred years before. In the Kingdom of Bohemia, the western part of what is now Czechia, when in 1512, some people discovered silver in a valley called Jakumstall. The lord at Jakumstall, Count Stefan Schlich, wanted to keep as much of that silver to himself as he could. But he needed help getting it out of the ground.

Speaker 2:
[06:40] So we went across the border to Saxony, found mining investors and mining experts and brought them over, dressed them up like a hunting party so that nobody would know they were actually silver prospecting. We went up into the valley, took a look at it and they found the silver and immediately started digging.

Speaker 1:
[06:58] The silver mine at Jakumstall was extremely productive, a lot of silver in there. But Count Stefan Schlich was not an entirely above board character.

Speaker 2:
[07:07] He was a huckster, he was a chancer. Schlich didn't actually have title to the mine.

Speaker 1:
[07:13] Essentially he was digging up tons of precious metal that wasn't necessarily his and smuggling it out of the country to pay his investors and to pay off his debts without paying taxes to the king of Bohemia.

Speaker 2:
[07:25] Just breathtakingly illegal. So what happens is eventually all the most important and powerful people in Bohemia figure out what's going on and they decide, okay, we got to lock this down. So they come up with a deal where they say, okay, you can keep doing this, but King's got to get a cut.

Speaker 1:
[07:43] No more hustling unknown quantities of metal straight out of the ground and over the border. To keep him honest, Schlicke would have to turn all of the silver into coins minted right there at Jakamstall. Uniform, pure silver, controllable coins.

Speaker 2:
[07:59] It was important to make them consistently sized, high quality coins because that was literally easier to divide up the shares.

Speaker 1:
[08:07] Some of those coins would go to pay the king and the rest could be sent back to investors for financing the mine.

Speaker 2:
[08:13] Okay, everybody who's invested in the mine gets 10 big coins. That's your dividend.

Speaker 1:
[08:17] What size is it? Like what size is it?

Speaker 2:
[08:19] Oh, it's like a silver dollar.

Speaker 1:
[08:20] So like still small silver.

Speaker 2:
[08:22] I mean, yeah, but for the time incredibly valuable.

Speaker 1:
[08:25] These physically small but incredibly valuable silver coins from Yacumstall, about twice the size of a quarter, were first minted in 1520 and they became known as Yacumstallers. Yacumstallers were not intended to be the new local currency, something regular people would use to buy loaves of bread. They were intended for people like investors and noblemen and merchants. But they were unusually reliable and thus unusually desirable. So desirable, the miners who were actually digging the silver out of the ground at Yacumstall to make the coins wanted them too.

Speaker 2:
[09:01] The miners are actually getting paid in low quality impure silver, and eventually they revolt three times. Literally, they strike and then they revolt. They like sack the town. And in their demands, they say, we want to get paid in the same good silver that's coming out of the ground here, in the same good Yacumstall coin that the investors are getting.

Speaker 1:
[09:22] By the end of the 1520s, Yacumstallers were spreading over much of northern Europe.

Speaker 2:
[09:27] What you have is a massive flood of big, pure, consistently sized coins. It's moving up through silver markets in Leipzig. It's moving up and out through the Baltic. It becomes really useful for paying tolls in Denmark and in Sweden. You start to see it be super useful in Russia because it was high quality and you could just count it instead of weighing it. And so they began to adopt it as a unit of measure.

Speaker 1:
[09:51] So what you're saying to me or what I'm hearing, Tommy, is that sort of like the innovation of the Yacumstaller is basically that it is consistent and convenient. It's a consistent size. It's a consistent weight. Like it is what it says it is. Everybody who touches it is like, oh, whether you're in the Baltics, whether you're in Russia, you're like, this is always going to be high quality silver of this size and this value.

Speaker 2:
[10:13] And it's the volume. It's the consistency and the volume together. The most important quality of money can have is that it be useful. The second most important quality that money can have is that there be a lot of it.

Speaker 1:
[10:27] As the Yacumstaller spread around Europe, its name got shortened to simply the dollar, or in English, the dollar. And pretty soon, other countries and city-states began to mint their own versions of it.

Speaker 2:
[10:41] People start to copy this coin, and they start to refer to their copies as their own dollars. You've got principalities all over the Baltic and the low countries going, oh, hey, we've got one of those too. They're just copies. Nobody's telling them they can, they just do it. And I think that's a thing often that happens in money. We think of money as a command and control thing, where the government says you got to use this money, and then you do. But far more often what's going on is people are making their own money in ways that are useful to them. That's far more common than this story that we have of new country, new money.

Speaker 1:
[11:12] By the mid-1500s, the Occam's Dollar had become the most important coin in the world, spreading far beyond Europe all the way to Asia. And that didn't happen because a country decreed it as their new currency. It happened by accident because a minor Bohemian noble got in trouble with the king and was forced to start making very consistent coins, which people all over the world found incredibly useful. So useful that countries started to adopt and adapt them. Even powerful ones, like the Spanish Empire. And it's thanks to the Spanish Empire that the dollar would spread even further. In the 1540s, Spain was in the midst of brutally colonizing vast regions of South America. And while doing so, it found enormous silver deposits, particularly in what is now Bolivia. These mines swiftly eclipsed European silver output, turning the new world into the hub of global silver production.

Speaker 2:
[12:15] As Spain is becoming an empire, it figures out this sort of brutal system of exploitation to get a lot of silver out of the ground very quickly at the mine in Bolivia called Potosi. What that does is that creates a new flood of silver. So it wasn't just that Spain found silver, it's that they figured out inside of an empire, how to produce a lot of silver very quickly.

Speaker 1:
[12:36] And if the Emperor of Spain wanted this silver to seamlessly become part of global trade, there was an obvious thing to do with it.

Speaker 2:
[12:44] When he sold his silver, he had to sell it in the form of a jachemsthaler. So he takes a pre-existing Iberian coin called a real, and then it turns out that if you multiply the real times eight, you get something that looks a lot like a jachemsthaler, and weighs almost the exact same amount. So they called this coin the piece of eight, the realest eocho. But any English speaker would have immediately recognized this coin as a dollar.

Speaker 1:
[13:08] What you are saying is the Emperor of Spain taps into a huge quantity of new silver. It is on the opposite side of the world of bohemian. And instead of just being like, oh, I have this whole new silver, I'm going to make a whole new system, the dollar is already so powerful. He's like, I have to just take this gushing bunch of silver that I've found somewhere halfway across the world and make it look exactly the same.

Speaker 2:
[13:31] That's exactly right.

Speaker 1:
[13:32] OK, just checking. The Spanish Empire is soon circulating Spanish silver dollars, or reales de ocho, on an even more unprecedented scale than ever before. These coins are truly everywhere.

Speaker 2:
[13:47] There's this huge global system of silver. It's leaving Potosi, it's leaving Zacatecas in Mexico, it's going through Europe, it's going at this point on galleons straight to Manila and to China.

Speaker 1:
[13:57] And some of it was entering the economy of the 13 British colonies in America, way before Alexander Hamilton was even born.

Speaker 2:
[14:05] The dollar was massively important within the colonies well before the revolution.

Speaker 1:
[14:10] And that's because the colonists needed those dollars. Great Britain declined to enforce its own system of pounds, shillings and pence in its American colonies. Or even provide the colonists with enough coins to conduct their daily business. So each colony was forced to cobble together its own monetary system. Out of basically IOUs, colony backed currencies like Pennsylvania shillings, and whatever foreign coins they could get their hands on. And the coins that were most useful and most likely to show up in North America were Spanish dollars.

Speaker 2:
[14:44] If you sold anything to the Caribbean, you could get dollars, because they were circulating up from the Spanish territories in Latin America. And in fact, the colonies are competing to bring in dollars. They're desperate for this silver coin, and they're fighting each other to attract it. So if you've got dollars, if you are literally a pirate of the Caribbean, and you need to sell them somewhere in the colonies, you have Pennsylvania and New Jersey and New York actively competing to give you more domestic purchasing power in their own colonies for your silver dollar.

Speaker 1:
[15:15] So this is the status quo when the American Revolution finally happens. And then America throws off the shackles of the British Empire and its monetary system. But instead of our founding fathers being like, hey, let's start a brand new money that's just all ours, they're like, everybody knows the dollar. Everybody wants the dollar. Let's just use that.

Speaker 2:
[15:39] Hamilton and Jefferson decided to base the new monetary system of a new country on a Spanish coin with a German name. Again, we joined an existing global dollar system. We did not create the dollar system. Our adoption of the dollar was not an act of sovereignty. It was an act of acquiescence.

Speaker 1:
[15:59] The dollar pre-existed us. We didn't create it. We just hopped on the dollar train because it was working so well. And it wasn't just us, the Canadian dollar, the Hong Kong dollar. Those aren't a reference to us. They're a reference to the Occam's dollar. Okay. So I found this history of the dollar, like, revelatory. Like, I mean, I had never thought about it, to be honest. If I had thought about it, I would have been like, yeah, we made up the dollar when we became a country. Like, I definitely would have thought something like that. But I will tell you the truth, which is, in your book, it is the thing that fried my noodle second most. And there is a thing that really did me in first most. That's a way to say it. And it is, so it was like, where is the dollar from? It's where does money come from? Which seems like it should be a simple question, but really did me in. Brendan, where does money come from?

Speaker 2:
[16:59] The bank just makes the money up.

Speaker 1:
[17:04] How it works after the break. So where do you think money comes from? Like who is creating all the dollars that we are exchanging and borrowing and earning and spending and investing every single day? I want you to take a second, especially if you're not a finance person, to see what you come up with. To be honest, before working on this episode, I had never thought to even wonder about this question. All I knew about where money comes from is where it doesn't come from. It doesn't grow on trees. When I did finally start thinking about this question, though, while working on this piece, my initial answer was something like, the mint? Brendan Greeley, veteran finance reporter and author of A New History of the Dollar, got a good chuckle out of that. Because while, yes, the US Mint does manufacture a bunch of coins, they represent only a fraction of the trillions of dollars out there being transacted every day.

Speaker 2:
[18:17] The slice of the pie that cash takes up is disappearing. We just use physical cash less and less.

Speaker 1:
[18:22] So if it's not the mint, then who? If you know anything about money at all, your answer is likely to have something to do with another government institution, the Federal Reserve.

Speaker 2:
[18:32] The Federal Reserve, or the Fed, is the central bank of the United States. As the central bank, it determines our nation's monetary policy.

Speaker 1:
[18:39] The Fed exerts an extraordinary amount of control and influence over the American economy, and everyone pays attention when it changes interest rates.

Speaker 6:
[18:47] Investors are anxiously awaiting to see if the Federal Reserve will issue another rate cut this afternoon, a move that could affect everything from mortgage rates to the prices of stocks and bonds.

Speaker 1:
[18:56] And in an introductory econ class to say nothing of the news, you will be told this important and powerful entity is the one ultimately in charge of creating our dollars.

Speaker 2:
[19:08] It's almost like alchemy. You can create money out of thin air if you're at the central bank.

Speaker 1:
[19:12] As a Fed reporter, Brendan heard this all the time.

Speaker 2:
[19:15] The Fed creates money. They do it out of thin air. It's there because the state says it is.

Speaker 1:
[19:22] But when Brendan got interested in monetary history, he began to realize that story is wrong.

Speaker 2:
[19:28] When we learn that the Federal Reserve is the origin of money, we have absolutely no way to explain how money worked in the 19th century because there was no Federal Reserve. It didn't exist.

Speaker 1:
[19:39] The Federal Reserve was founded in 1913. Obviously, we had money before then. And we got it the same way we get it now.

Speaker 2:
[19:48] The system we still have today in America is a consequence of the Constitution, which is money comes from banks. Private commercial banks make almost all of the dollars that we use on a day-to-day basis.

Speaker 1:
[20:07] Banks are a part of most of our lives. Most of us have money in them, the money that we use to pay for just about everything. And we also know that banks are big and powerful. When they fail or get into trouble, they can take the entire economy with them. And yet for all their tremendous known powers, most people do not think of them as straight up creating money. And to really grasp how surprising this was, at least to me, I need you to understand the typical story about how money gets created. Basically, we need to explain the not quite right, but widely accepted common wisdom about where money comes from, in order for you to appreciate what Brendan is saying about banks. And to do that explaining for us and give Brendan a bit of a heat check, I went to someone with a keen interest in money.

Speaker 5:
[20:56] Well, let's face it, who isn't interested in money? But I'm interested more in the sort of the behind-the-scenes sort of stuff.

Speaker 1:
[21:04] Mark Blyth is a political economist at Brown University, who teaches a course called the Architecture and Plumbing of Global Finance.

Speaker 5:
[21:11] And it's based on the fact that most people who do study this stuff, read books that take things for granted, like it starts mentioning bonds and bills of exchange and swaps and derivatives. And hardly anybody ever bothers to tell you what this stuff actually is or where it comes from.

Speaker 1:
[21:27] And so that's where Mark steps in, to actually bother to explain the stuff we take for granted. Like for instance, where the money that circulates in the economy actually comes from. And Mark started with the aforementioned conventional wisdom about how the Fed makes our money.

Speaker 5:
[21:45] If you ever get dragged kicking and screaming into a basic econ class and they bother to tell you about money, they tell you this story and it's called Fractional Reserve Banking.

Speaker 1:
[21:54] This story, the one you hear in Econ 101, starts with ordinary people making deposits, people like me.

Speaker 5:
[22:01] You're the depositor, Willa comes along, drops 100 bucks into the bank. The bank says, I'll pay you 3% for a year for holding that. And you're like, well, suppose that's better than sticking a mattress. Whoop de doo. So you gave the bank the money. The bank then finds thousands of other Willas of different sizes and collects all of those deposits and then says, right, I've now got a million bits of currency. What am I going to do? I'm going to lend this on to all the people on the other side who want to borrow it. It's 6 percent. And that 3 percent difference is the spread that I make my money on. That's the basic model.

Speaker 1:
[22:34] This is the It's a Wonderful Life model of banking, right?

Speaker 5:
[22:38] Yes, it is. Exactly right.

Speaker 3:
[22:40] You're thinking of this place all wrong as if I had the money back on a safe. The money's not here.

Speaker 1:
[22:46] In the classic film, It's a Wonderful Life, George Bailey, played by Jimmy Stewart, manages a building and loan association, which is not exactly a bank, but close enough for our purposes. People leave cash deposits in the care of the building and loan. But then there's a run on the bank. Everyone tries to withdraw their money at the same time, and it's a problem because it's not all there. The building and loan has lent it out just the way Mark described.

Speaker 3:
[23:14] Well, your money's in Joe's house, that's right next to yours, and in the Kennedy house, and Mrs. Mikelin's house, and a hundred others. You're lending them the money to build, and then they're going to pay it back to you as best they can. Now, what are you going to do, foreclose on them?

Speaker 1:
[23:26] But what George Bailey doesn't explain, because, well, nobody asks, is that his bank isn't just redistributing the deposits. If banks just took in money and lent out exactly what they took in, they'd just be middlemen. But they do more than that.

Speaker 5:
[23:42] So banks don't just act as intermediaries, they act, if you will, as amplifiers.

Speaker 1:
[23:47] Here's how it works. Let's say I've deposited $100 in the bank. The bank doesn't have to keep all that $100 on hand. It only has to keep a fraction of it in reserve. That fraction can change, but to keep the math easy, let's say 10%. So I deposit $100, the bank holds on to $10, and then it can lend out $90, say to our producer, Max. Now, this may sound like it's just moving the money around from one place to another, but it's not. I still have $100, I can go to the bank and get it. But now Max has $90 in his bank account too. Where there was just $100, now there's $190. Money has been created in the system. And there's one more really important part of this theory. The money a bank has in reserve. It doesn't just come from depositors. It also comes from the Federal Reserve, America's central bank.

Speaker 5:
[24:50] The central bank decides there's a certain amount of what's called base money. And base money is going to go out into the banks. And it gives that to the very big banks. And the very big banks then take that money and they go, all right, let's lend that out to the smaller banks. So they lend it out to the smaller banks. And then the smaller banks take that and use that as their reserves.

Speaker 1:
[25:11] If a bank gets a million dollars from the central bank to hold in reserve, they can then loan out, say, 10 million dollars. That 10 million dollars shows up in other people's accounts. Voila, money has been created. This is the theory of fractional reserve banking. The bank only has to keep a fraction of money in reserve, and the rest they can lend out, creating more money. So that's the Econ 101 version of how money gets made. That's the way people tend to think money is created. But Mark and Brendan are united in saying that theory, it's not actually how almost any of the money we use today comes to be. There's another theory that's much closer to reality.

Speaker 5:
[25:56] The theory called, wait for it, endogenous money, right? Okay, what does that mean?

Speaker 6:
[26:00] What? No, come on.

Speaker 5:
[26:01] I know, exactly. No, the basic trick of economics is make things sound much more complex than they are, so you can charge a premium. What's endogenous money? The idea that banks make the money themselves, and it's not really about depositors, and it's not really about the reserves.

Speaker 1:
[26:14] Banks are not intermediaries or amplifiers. They just straight up create money.

Speaker 5:
[26:21] So imagine that Willa has a thing for motorcycles, and she wants to buy a motorcycle, and it's a Ducati, and it's going to cost her $15,000. So lacking the cash, you go to the bank and say, I'd like to buy a life-ending motorcycle, please. And they go, yes, absolutely. There you go. So you put down $3,000, and then they lend you $12,000 to 10%. Now, you could imagine a world in which some other Willa funded that loan, right? But they actually just make it up. They just immediately digitally credit $12,000 to your account. You go to the dealer. The dealer then just basically takes that and then sends it to another bank as a credit. And you get a motorcycle. Now, that's the creation of money. They've just created $12,000 like that. Nothing, no bar.

Speaker 1:
[27:06] Okay. No, no, no, no, no, no, no, stop. You're saying that when they say, okay, here's $12,000, which they never give me in cash, but it's like in my account and then I give it to someone else, that they made it up.

Speaker 5:
[27:20] Yes.

Speaker 1:
[27:21] Do you mean to say they have it, right? Don't they have that?

Speaker 5:
[27:25] They don't need to have it. I mean, they have other things. They've got billions in mortgages, they've got holdings of domestic and foreign bonds, and they have billions in assets. You're not even a rounding error. But what they do with all of the people like you and actually money in general, this is the general story, they just go, all right, is it profitable to give Willa alone or not? You look at your credit history, which is why all those numbers exist, and they decide you had a good credit risk, and they give you the money for the motorcycle, and in doing that, they electronically create $12,000 at a thin air. Then they give that to you, you give it to a bike dealer, the bike dealer gives it to their bank, their bank now has $12,000 in cash. That's how it works.

Speaker 1:
[28:07] In fact, no less than the Bank of England has written that 97 percent of the money that we use in the modern world is created in this fashion. It even says this money, all 97 percent of it is sometimes called fountain pen money because it's created by the stroke of a banker's pen.

Speaker 5:
[28:27] Now, it's not as if you can do this with no consequences. If you make bad bets, you can go out of business. If you get too highly levered, you basically have too many loans out there that don't get paid back relative to your deposits, then you got a problem. But most of the money in circulation that we use in any shape or form has been made up by a bank or similar financial institution. The notion that we fund 30-year mortgages off of weekly deposits, it's just not how it happens.

Speaker 1:
[28:56] The money they give me for the mortgage, they just made up.

Speaker 5:
[28:59] Make it up.

Speaker 1:
[29:02] I just want to point out here that this theory, the endogenous money theory, is much simpler than the story of fractional reserve banking, where depositors and the Fed give the banks money and they hold some of that in reserve and then they loan out a bunch more and that creates more money in the system. That is a much more complicated mechanism than the banks just marking up new dollars when they make a loan. And yet I struggled with the simpler version. It just seems too simple. That's how money gets made? A commercial bank makes it up? Shouldn't it be harder? Shouldn't the government be involved? It sounds like magic or make believe, like poof, money has just appeared. But Brendan Greeley actually really hates this way of talking about it.

Speaker 2:
[29:50] You know, there's this idea right now that you learn when you take a freshman course in economics, that money is a social convention. I mean, yeah, sure, but so is your mortgage. When you take out a mortgage, the bank is giving you brand new deposit dollars that it created on the spot. In return for those deposit dollars, it's getting from you a formalized promise to pay them back over time, as per the terms of your mortgage. All of these things are explicit financial promises. And we're much better off thinking about those financial promises, examining them, trying to figure out like why they have meaning, than just waving our hands and saying, look, it's all just a social convention. It works. Don't worry about it. Because that makes the whole thing seem like magic. It's not magic. It's finance. Like, we can understand it. We can have like a normal layperson conversation about why this stuff has meaning.

Speaker 1:
[30:39] Like, I take your point. It's like these are part of large financial institutions with extensive and complex balance sheets. And it's not like they're just like, they're not like the tooth fairy, right? Like, this is how the system actually functions, does not make believe. But when I hear like, the bank just rates the dollars up, I'm like, something about that just really seems wrong to me. And I suspect that like the real knock on effect of this is this thing that we all know is true, but this is like a really profound way of seeing it is that how powerful banks are.

Speaker 2:
[31:19] Yes, that's exactly right. They're insanely powerful. We've given them this power. And in return, like we need banking regulation to make sure that like they don't periodically blow up because bankers like to take risks. That's great for them. Like I'm really glad that bankers like to take risks. I'm not a banker. I don't like risks, but I'm glad that those people exist in the world. We need them, but they also need to be reined in with like basic regulation to make sure that it doesn't endanger everybody's money. And if we don't understand, I think you're exactly right. If we don't understand that the banks make the money, then we don't feel the same compulsion to make sure that they make it responsibly.

Speaker 1:
[31:59] We have these kind of patriotic assumptions about our economic system, that Alexander Hamilton and the founding fathers, full of strength and wisdom and fortitude, carefully created a financial system for us. They invented the dollar, which took over the world. Then their descendants sagely created a Federal Reserve, and it took on all these powers so we can sleep easy. But the truth is stranger, more provisional, historically inflected and weirder than that, as the truth usually is. But you can start to see it if you just take the dollar, the one in your hand, the one in your bank account, and look at it anew. This is Decoder Ring. I'm Willa Paskin. As ever, please consider signing up for Decoder Ring Plus. You get to hear our Decoder Ring's back episodes, skip all the ads, and support the work that we do. You can join by going to the Decoder Ring show page on Apple Podcasts or Spotify, or visiting slate.com/decoderringplus. I also really want to tell you and encourage you to buy Brendan Greeley's forthcoming book, The Almighty Dollar, 500 Years of the World's Most Powerful Money. It comes out in late May, and so you should pre-order it now as a gift to yourself. You will not regret it. It contains so much more dense history and fascinating, eye-opening information than we possibly could have shared here. Do it. This episode was written by me and Max Freedman, who also produced it. Decoder Ring is also produced by Katie Shepherd and Evan Chung, our supervising producer. Merritt Jacob is senior technical director. I'd like to thank Lizzie O'Leary. If you have any cultural mysteries you want us to decode, please email us at decoderring at slate.com or call us at 347-460-7281. We'll see you in two weeks.