← The "What is Money?" Show
The "What is Money?" Show
WiM044 - The Saylor Series | Episode 10 | The Death of Gold
01:20:16
Michael Saylor joins me to discuss anthropology, energy, and technology from first principles as we build the intellectual foundation necessary to truly grasp the historic significance of Bitcoin.
Loading summary
Transcript59 lines
- [00:00]
Robert Breedlove
Foreign hey guys, this is Robert Reedlove from the what is Money? Show. And as you've learned by watching this show, Bitcoin is the single most important asset you can own in the 21st century. And one of the most important companies in Bitcoin today is NYDIG. NYDIG's mission is to facilitate financial security for all. They accomplish this by bringing a high level of professionalization and sophistication to the bitcoin marketplace. As a true game changer in the industry, NYDIG is safely unlocking the power of Bitcoin for forward thinking individuals and institutions alike. By using nydig, you will gain access to an end to end institutional grade platform which providing bitcoin OTC transactions, bitcoin collateralized borrowing, secure custody, asset management, derivatives financing, market research and more. And all of these services meet the highest regulatory, governance and audit standards. Led by Robbie Gutman, Yin Zhao and Ross Stevens, NYDIG has absolutely exploded onto the bitcoin scene recently and is leading the way for ongoing institutional adoption in this nascent asset class. So please be sure to check out NYDIG as a single source for all your bitcoin needs. All right guys, welcome back to the what is Money Show. I am thrilled today to have Mr. Michael Saylor sitting down with me to discuss bitcoin money history as we add some additional installments here to the Sailor series. Michael, welcome back.
- [01:47]
Michael Saylor
Thanks for having me, Robert.
- [01:50]
Robert Breedlove
So, you know, I've told you about the feedback we've gotten on the Saylor series. It's been absolutely tremendous. People are reporting that it completely reshaped their worldview, you know, sent them down the rabbit hole. It's been very valuable. And so I commend you for that. And I think the right place to jump in here today since we're taking the big picture approach, is to just answer the question, what is money?
- [02:23]
Michael Saylor
Yeah, you know, I never in my life had anybody asked me that question before. You asked it to me the first time for our first series and when you asked me that question, that catalyzed a whole set of thinking and it got me thinking. Money is energy. And of course we did the nine part series and we spent a lot of time talking about energy systems and engineering as a discipline of manipulating energy and why it was critical to the human race and the human condition. And so we won't recover any of that because that's well trod territory. But coming back to the question of what is money? And just focusing on it, I would say for our round two or Part two of this series, I'd say money is tokenized energy within a socio political framework. We know money is energy, but tokenized energy, that is a dollar is a measure of energy. A gold coin is a measure of energy. A bale of tobacco that you're trading, it's a token of energy. And how much energy? Well that's where the socio political framework comes in. Whereas you can measure actual physical or engineering energy and it's objective. But money ends up being to a certain degree subjective because it's yeah, if I show up on a deserted island and I've got a stack of gold coins and everybody has guns and they're shooting each other, they might not accept my gold coin. Whereas if I actually offer them bullets for their gun, they might think the bullets are actually better money than the gold coin. Just like cigarettes, right? Or good money in a POW camp. But gold coins wouldn't be. So this question of what is money? Gets you really going. So money is tokenized energy within a social political framework. Then we can look over the history of mankind and we realize that we've chosen many different ways to tokenize that energy. And we'll skip through most of them because they came and they went. But there are three that pop to mind that are interesting. One is the gold standard, the second is the fiat standard, and the third is the Bitcoin standard. When you start asking what is money? You start asking, well, what's the best monetary system? We've got these three systems to talk about. I think that one thing that's pretty clear is that most people can't get their hands around Bitcoin because it's an utter paradigm shift. And why is it a paradigm shift? Well, because I think Bitcoin is the first digital money. It's the first digital money. Gold wasn't digital money and Fiat's not digital money either. And so economists and politicians and investors, they all lack the right mental model to understand Bitcoin. Because science and engineering were so intrinsic to gold that we took it for granted. Because gold was a 10 pound lump of something and if you get slugged in the head with it, nobody had to explain that science and physics mattered. Then science and engineering became quasi irrelevant. In the fiat world. Everybody just, they ignored science and engineering and there were no immediate clear consequences. There were just the hyperinflations and the collapses of those fiat systems. But because they abandoned gold and there was no digital money, the only alternative to one Fiat, the Weimar Republic fiat currency, was the next, the pound. And that alternative was an alternative to the next thing. And the next thing, we were comparing fiat currencies or fiat monies to each other. And so there was no real need to embrace science and engineering. Bitcoin is this paradigm shift where we have digital money crashing into, I guess, what we'll call analog money, or maybe a political money is a better way to describe it. Now we start to ask the question again, what is money? And I think tokenized energy isn't good enough to explain what is money? Another way to describe money is by coming back to the ideal model. What is the ideal model of money? Ideal money is a shared, immutable, correct ledger. You've heard the phrase bitcoin is a shared, immutable ledger. And people debate about whether it's truly immutable or not. But a crypto asset network, fully decentralized and mature, is the closest thing we can get to an immutable, shared ledger in the history of the world. I think a lot of times when people describe it as a shared, immutable ledger, they leave off the correct or the mathematically correct because it's almost implied. But I think that if you were to focus upon the three critical dimensions of ideal money, you would say it's a ledger that's shared. Everybody in the political system has to have the same access to the ledger. It has to be immutable. No one can doctor it, but it has to be correct, mathematically complete, or mathematically proper. Because if it's incomplete or incorrect, then it's not ideal money. So if I take that as a model money is shared, immutable, correct ledger. Then I can imagine the perfect money would be, you know, some godlike being comes down on earth, and they create this perfect, uncorruptible system, and they telepathically. They telepathically drop that shared, immutable, correct ledger into the heads of every human being. And every time you incur a debt, it updates the ledger. And when you incur a credit, it updates the ledger. And no one can corrupt the ledger.
- [09:37]
Robert Breedlove
This is getting right to the heart of property, where it's essentially a list of who owns what. And that ownership is premised on what favors have you rendered to the market. Then you've earned some right to redeem favors from the market. And money is just the ultimate form of property and one that can be redeemed for any other form of property.
- [10:01]
Michael Saylor
Yeah, I mean, a shared, immutable, correct ledger could be used to allocate ownership of all intellectual property. You kind of need it to keep track of your music rights or your video rights or your movie rights on your itunes store, what do you own or the registration and licenses? Can I enter a building, Can I exit? Can I cross a border? What are my rights and what are my obligations and what do I own and what do I share? And it all comes down to just a shared database. But that database needs to be immutable and correct, and that is property, the essence of property, I suppose, when you own a piece of property and you buy it a piece of land, five acres somewhere, then there's a deed and you go and you file the deed with the courthouse. And that's kind of critical. Right. And so much of property law revolves around making sure that there are no liens on the property before I buy it, Making sure that you have the proper title to it and that you can transfer that title. And I think that money. Right. To your point. Right. It's kind of like the apex property. It's the sum of all property, or at least it's the most important property property, I suppose, because it would be the property that I could use to trade for any other property.
- [11:40]
Robert Breedlove
Exactly.
- [11:42]
Michael Saylor
Any other property or any other product or service that is my tokenized energy.
- [11:48]
Robert Breedlove
And what you're describing here. Sorry, just one more thing. Is this movement of money out of the sphere of politics into an engineered standard. One definition of politics I really like is the discussion of how to apply coercion. So bitcoin seems to be this type of money that's actually moving economics out of the sphere of politics into a more hard science. That seems to be part of this paradigm shift, as we've always thought money was in the domain of who could apply force, but now it's moving into the domain of what scientifically proper. Yeah.
- [12:30]
Michael Saylor
Maybe we're moving from politically engineered money to scientifically engineered money.
- [12:37]
Robert Breedlove
Yeah. From social engineering to scientific engineering.
- [12:42]
Michael Saylor
Yeah. Is that money because the most important person in the village said it's money? Or is that. Is that money because the best engineer offered it as money?
- [12:56]
Robert Breedlove
Yes.
- [12:58]
Michael Saylor
You know, Satoshi engineered money, whereas, you know, every government has created money.
- [13:07]
Robert Breedlove
Yeah.
- [13:08]
Michael Saylor
So if we look at. If we start with that model. Right. Shared, immutable. Correct. And now we go back to all the monetary systems in history. Start with ancient coins. Right. Coin networks. Well, there have been so many coin networks. Right. Starting with the Lydians. Each coin network is, well, I have a gold coin, I have a silver coin, I have a copper coin. Oftentimes there's three different coins. One for 1,000, one for 10, one for one, they have to be at three different scales. The shortcoming is you create a system of coinage or custom tokens, and then you start shuffling them around in a network. You can only trade to the extent that you have those tokens. And if people lose the tokens, the money's gone. But then people try to counterfeit the tokens. They try to cut the coins different ways. Eventually, the coins might wear down. The coins have to be carried. And so why do all these coin systems fail? I guess on one hand, there's never enough of them. There's always a limit. On the other hand, they're discrete. So you can go from 1000 to 100 to a 10 or from 1000 to a 10 to a 1. But how do you get to a 0.1 or 0.01? When you want to get to orders of magnitude more or you want to make change in the middle, you end up with all these money changers. And the result of the money changing is a huge amount of friction or impedance. And for thousands of years, people couldn't figure out how to manufacture coins that couldn't be cut or counterfeited or that were durable. And so ultimately, every single. And every single mercantile system has its own internal coin system. And when you swap from one system to second, there's this money changer in the middle, and they take you for 10%. I remember traveling from London to Rome back before the EU was formed, Robert. And I showed up with dollars, and I converted my dollars into pounds. And then I think I took a plane to Netherlands, and I converted my pound to whatever the Dutch currency was. And I went to Belgium, and I converted the Dutch currency to the Belgian currency. And then we went through France. I converted again. And then we went to Italy, and I converted again. I ended up with 50% of what I started with after about 72 hours.
- [16:01]
Robert Breedlove
Which makes sense to that energy analogy, because every time you have a transformation of energy from thermal to kinetic to chemical, whatever direction it's going, you have loss. So there's this problem we've always had, transforming one form of energy into another.
- [16:17]
Michael Saylor
And back crossing a coin network is every single time you cross the network, there's energy loss and then there's loss over time as people counterfeit the coins and you can't tell. And then there's losses as the coins get debased. And so the result is what, like 5,000 different systems of coinage over time, and every one of them struggled. Ultimately, they were the basis of the gold standard. And we have this Myth that there was a gold standard in the good old days. But it seems like the gold standard never worked as far as we can find anywhere. I mean, we have the stories of the Romans debasing their coinage and the collapse of the Roman Empire, and we know the Lydians eventually lost theirs. And we know there must have been hundreds of systems of coinage in Greece, and one city would sack another city and melt down their coins and create the next set of coins. So, I mean, there's a problem with the whole idea of coinage. And the problem with coinage is it's based on metal, metallic money. And of course, the highest form of money is the gold. So let's say it's called the gold standard. But what's the problem with the gold standard? I mean, it never worked that well because it's got a couple of some crippling flaws and just some nagging flaws. There's inflation. Inflation's a nagging defect. It doesn't inflate fast. It's like it inflates slow, but inflates at 2 or 3% a year. And because it's inflating, because you're mining more gold and you're striking more coins or whatever it is, you're moving around. It's not conservative. And by that I mean it's not mathematically conservative, or it's not conservative from a scientific point of view. You start with 100 units, and then you've got 102 units, and then 105 units and 108 units. So whatever percentage of the gold supply you have is leaking at 2 to 3% a year. And if it gets. And it could be worse if it's not a closed system. So if anybody introduces new gold into the system, like when the Spaniards found the Inca gold, they brought back the gold from the New World, you get a massive inflation. I remember reading a history of Caesar where when he came back after the Gallic wars, he had seized so much gold that that created a hyperinflation in Rome and the interest rates leaped and there was just too much money. So either there's inflation because you seized gold, or another nation flooded your market with gold, or there's inflation because the gold mining process continues. And so, against our ideal model of money, that means that gold's not mathematically correct, it's not conservative, nor is it correct. It's an approximation. Under the best of circumstances, it's got a 2% error a year. And so over the course of a decade, the best of circumstances is like a 20, 25% error rate. But the worst of circumstances is I double or triple the amount of gold when I come back from sacking the Aztecs or the Incas or I sacked Gall and I just brought back all this gold. And so then you've just got a massive error. Gold is mathematically erroneous because you're just shuffling metallic tokens and it's not a closed system. The second problem with gold is confiscation because it's physical. The custodial rights of gold aren't really. They're not great. I guess they're a little bit better. They're a little bit better than fiat currency. But in some ways they're not as good. If I have a lot of gold, if I have a million dollars worth of gold or $10 million worth of gold, it's heavy, really heavy. I can't get it through an airport. I don't even know. I went online on Amazon once a few years ago and I wanted, I wanted a little pocket knife and I ordered this pocket knife. You know how pretty much you can only carry a blade which is like, I don't know, half an inch long or it was. What's the number? It's like some infinitesimally small size blade, like a quarter inch or half an inch blade. So I went on Amazon and I found someone advertising this really super small, dinky little knife that you could use to cut a string with. And it was advertised as being a TSA friendly, compliant little pocket knife. And I was so proud of myself because I must have paid like $39 for it. And then I took it to the airport to go through the metal detector. And I swear that the TSA agent stopped. I put all this stuff through. They stopped the luggage. They're like, show me that. And they pulled out this little half inch blade to slice a string with, like, sir, you can't take this with you. And I thought, I can't believe. Of course, the defense of Amazon said it's okay. Didn't really fly right. And the point of the story is you can't even slip a needle, like metal blade through an airport. I wonder if you could carry five gold coins and get away with it. Or 10 gold coins if you can't get my little pen knife thing through. And so the answer is, it's easy to confiscate. Custodial rights are really weak. The fundamental problem with the gold standard is the custody is difficult and the security is hyper expensive. And by hyper expensive, how much does it cost to secure a billion dollars worth of this stuff. You hire 24 armed guards and you Fort Knox cost of custody, it scales.
- [23:03]
Robert Breedlove
With the amount stored, which is something that's very problematic.
- [23:07]
Michael Saylor
Yeah, the cost, you would say if there's a small amount of it, it's impossible to secure. And if there's a large amount of it, it's expensive, exponentially expensive to secure. And the security cost scales in some ways exponentially with the amount you have and also with the number of nodes. If I have 100,000 nodes, I have 100,000 points of failure. And so it scales with the number of nodes, the value of the nodes and the velocity of the nodes or the velocity of the money. Right. If I wanted to move a billion dollars of gold every day of the week for 365 days in a row, 1,000 miles, figure out the security cost of that. The conclusion is this money is so heavy, it has no velocity. It goes into Fort Knox, it sits there for 30 years and nobody audits it. Under that circumstance, you can almost delude yourself into saying it's secure. But it's only secure because there's no money velocity and there's no distribution. If I wanted to give gold to 8 billion people and wanted to move it every day, then the cost of the security would go up to consume all of the energy that humanity produces, right?
- [24:30]
Robert Breedlove
Right.
- [24:31]
Michael Saylor
Probably. Probably the cost of security for 8 billion people moving gold every day is more than the sum of the entire gross national product of the world.
- [24:41]
Robert Breedlove
Right.
- [24:44]
Michael Saylor
The security cost doesn't work, doesn't scale.
- [24:47]
Robert Breedlove
This gets into then that separation between or the decomposition of money into an asset and a currency then. Right. So gold is functioning as an asset, but it's not useful as a currency. Something that circulates. Therefore we introduce a currency. And the other thing on gold, I guess it's the best approximation of that immutable ledger that you described as ideal money. But it still has this error rate for both inflation, which is relatively small. But the bigger error rate has to do with the violence and confiscation risk that it's unpredictable when the market's going to be flooded or if you're going to be confiscated, or if your custodians trustworthy, et cetera.
- [25:27]
Michael Saylor
It's not correct because it's tokenized energy. And it was the best idea for tokenizing energy in the Bronze Age, I suppose pose. But it's not a correct token. And because it's so easy to confiscate, it's not really a shared ledger anymore. It's not shared Tokens because I can't share it, because I can't carry it with me. And then that leads us to the third problem with it, which is the hypothecation. It's too easy to counterfeit and manipulate. And it's easy to counterfeit because I can either debase the coins themselves or I can lie about the gold, about the asset in the vault while I give you a gold note. I either create the gold note and I lie about it, or I just debase the coin. And that creates a problem of authenticity. And that leads us to the fourth problem, which is authentication. It's too expensive to audit and authenticate. In fact, out of everybody that I know, I don't know a single person that's ever authenticated a gold coin. You wouldn't know how. Coinage was an attempt to make authentication self evident. Right, right. And you know, Isaac Newton worked on how do you create a good coin? And most coins were crappy. But, but you know, we still struggle with this issue. And so if you can't authenticate it, then that really undermines the shared part of the shared ledger as well, and maybe the correct part. And so transportation is also a defect. It's too expensive and slow and difficult and dangerous to move. And distribution is a defect because it's difficult to move, difficult to authenticate, and easy to confiscate. Then that means how do you distribute it? It's too difficult to distribute and too expensive to distribute. When I talk about distribute, I mean how do I give it to a billion people? Practically speaking, if you distribute up to $1,000 of gold coins to a billion people today, there would be a 35% markup, markdown. Every time it trades. You pay $90 for $60 worth of gold. If you have $60 worth of gold, you'd be lucky to sell it for $40. And so that transfer cost is obscene. And then finally, you got this division issue. How do you divide a 1 ounce gold coin? You can't. And so I can't divide it. So I have to create silver coin and copper coin. And now I never have the right combination of change. So prices don't work quite right. So gold has fundamentally, it's the best tokenized energy in the Bronze Age. But because of all these, all of these defects, by the Middle Ages it was clear it was going to be replaced with some, some type of fiat or some kind of checking system or other paper ledger system. It's not clear to me that they didn't replace it. I talk about the gold Myth, it's not clear to me. They didn't replace it 2,000 years ago. Like, you know, they talk about the Sumerian tablets, right? And the Sumerian tablets of clay, they have ledgers on them, right? So isn't it quite possible, if not likely, that we had checking systems or ledger systems that were privately enforced by banks thousands and thousands of years ago? So the gold myth is there never was a gold standard. There was never a time when all money was gold. What you had was a time when the principal asset for store of value over the long duration was gold. And it's quite likely that you always had the merchant had their ledger, and you had a credit with the merchant, and maybe that was a credit with the ancient Roman merchant, and maybe that was a credit with the town, or maybe that was a credit. If you're on a ship, anybody who's ever been on a ship sailing for months at a time, the quartermaster has all the supplies. And if you wanted some of those cigarettes or some of that alcohol, they might let you sign it out, but then they charge your account, and when the voyage is over, they debit it against your wages. And so this has been going on for as long as people have been sailing ships around. What we have is the myth of the gold standard. But we've always had an asset currency system, and the currency was a checking system with a central counterparty. We can call them banks today, but we had goldsmiths, right, that had gold notes back in the Middle Ages. And I think you've always had merchants, and you've always had quartermasters, and you've always had the guy in the army that said, you know, you lose it, we're going to bill your wages, we're going to dock your wages for that, you know, whatever it is you lost or you spent or you consumed.
- [31:20]
Robert Breedlove
I think this is a really important point to zero in on, because what gold gave us was this reliable medium for final settlement, but it could only be used for large transactions, essentially because the economics don't make sense to use it for small transactions. So it doesn't circulate well, but you can settle large transactions with it. So due to that technological limitation of gold effectively had such a high value to weight. I guess you might say that we needed these cheaper system, these credit systems or derivative systems, systems of deferred settlement built up around it. That has been the problem throughout history. We had this system for final settlement, but we build systems of deferred settlement around it, which are economically more efficient, but they introduce all of this need to trust counterparties, which comes with counterparty risk, which blows up time and time again.
- [32:19]
Michael Saylor
And one of the implications of that is the social political systems we can create are small and local. The implication is city, state, because I have to get my credit from the local merchant. So if the local merchant is 1,000 miles away, the credit system doesn't work. It breaks down. So I think you can create a trust network that goes about 10 miles or 20 miles.
- [32:48]
Robert Breedlove
Yes.
- [32:50]
Michael Saylor
Network out to the suburbs, and then once you get beyond the suburbs, the trust breaks down. And if the trust breaks down, that means you've got Renaissance Italy with 100 different cities, states, and they've all got their own little system of trust and ledgers and coinage. And there is no universal money. And so you can't have an easy rise of the nation state under a gold standard or a coinage standard at least. It's kind of challenging, right?
- [33:23]
Robert Breedlove
It's fascinating to me that the actual shape and configuration of our institutions is derived from the nature of our money. In a way, the reason we have a central bank is because of gold's technological limitations. So what it gets me really thinking about is when you swap out gold for Bitcoin, how transformational it potentially is to all the institutions we take for granted today.
- [33:50]
Michael Saylor
Yeah, I think that what we see is the progression of money as technology through the ages. And if you have a better money, you have a better economy. And as the money gets. If we come back to this issue of, is it shared, is it immutable, is it correct? The greater the sharing, the greater the economy, the more immutable, the higher efficiency of the economy, the more correct, the more effective the economy, the faster the network updates, the faster the economy coming back or just finishing up on gold. Why does gold fail in theory? Why does gold fail in theory? It fails because the base layer protocol is okay. It's God given by nature. It's the creation and the smelting of gold. It's okay, but it's not conservative. The base layer protocol is not conservative. The application level protocol, that one layer above the base layer, the layer two, the application protocol is difficult and dangerous. What does that mean? Like, so I give you 10 blocks of gold. That's the base layer. Okay, well, so what are all the applications of gold? What can you do with how many people do you know that can actually refine or melt down molten gold and create something with it? That's the dangerous part and the difficult part. So gold applications, they're difficult and they're limited by the Laws of physics. And that just means. And there is no application protocol. So if I want to do anything with gold above the layer one, it's either a very difficult, dangerous application like gold goblets or gold coins or something like that, or I have to create the equivalent of gold check, which is a manually implemented protocol. Now we've got the same problems with fiat currency. At the point you implement a gold check, you've in essence moved onto the fiat standard with a gold reserve of some sort. So gold fails primarily because there's no good application protocol. It's not conservative, it's too difficult, too slow, too dangerous. And the physicality of it, the physicality of it invites violence. I can literally firebomb the city, kill everybody in it, and the goal won't be damaged. And so like, when in doubt, shoot first and then sift through your clothing and take your gold. I don't have to worry about any collateral damage. The last thing in the world you want to do is be carrying around immutable money on your person when someone has an incentive just to kill the people and take the money. So that's the fundamental problem with gold. That's why the gold standard ultimately has always just been an invitation to war and never ending, I think. Thousands and thousands and thousands of wars and little many wars, right? Invitation to criminality, invitation to violence. If the criminals don't take your gold, then the counterparties take your gold and the counterparties don't take your gold. Then your own government takes your gold and your own government does take your gold. The hostile government takes your gold. But ultimately gold, because of his physicality, is imperfect property rights and is an imperfect property and it's imperfect money because the token itself is so cumbersome and unwieldy to utilize.
- [38:24]
Robert Breedlove
And this is. So it's Bronze Age money, as you said, but this contention over gold that extends right up into the 20th century. In World War I, World War II, there's still massive gold flows taking place geopolitically while those nations are at war. So it's almost, I think it's an ill understood aspect of human history that a lot of the violence between countries has been over the gold or about the gold. But it's not often discussed in the history books.
- [38:57]
Michael Saylor
Yeah, I mean, when you think about it, you never read a historical account where someone says, yeah, we invaded their country and we killed everybody so we could take their paper currency.
- [39:15]
Robert Breedlove
Right.
- [39:18]
Michael Saylor
I could give you 5,000 accounts of we sacked the city, we burned it and we took their gold by the way we might have sacked a city and hauled the people off in slavery, but we might have taken their livestock. We prefer to take. Normally the livestock's all dead by the time we take the city, though. So the people are dead, the cattle are dead, the food is gone, the water is all gone, but the gold's still there.
- [39:48]
Robert Breedlove
Yeah.
- [39:49]
Michael Saylor
So generally, if you look at the first 5,000 years, it's, we sacked the city, we took the gold. Then even in the modern era, you know, from 1700, 1800, 1900, you know, we. We sacked the city. Okay. What do we make off with? There's not that many diamonds, so normally they're not. They're not easy to find. There's not. Not a lot of that sometimes, you know, the Nazis took the ark, right?
- [40:13]
Robert Breedlove
Yep.
- [40:14]
Michael Saylor
And the Nazis took the gold. And so there's a lot of that. You know, we took the gold from the treasury. Stalin sees the gold during the Spanish Civil War, you know, and the Poles had to smuggle their goal away to keep it from the Nazis. And there's all sorts of examples of somebody sacking some city or rolling over someone's border to take their gold. That's because it's takeable, right?
- [40:45]
Robert Breedlove
Exactly.
- [40:46]
Michael Saylor
It's like, why do you want to take it? Because it's takeable. But not a single example. The Nazis didn't want Norwegian paper currency. They didn't want Swiss paper currency. They didn't want the Dutch or the French paper currency. And not many people ask the question, why we didn't take their checks, we didn't take their securities, you know, because at the end of the day, securities and derivatives and all these things have no value. Maybe the factory has value.
- [41:21]
Robert Breedlove
Yeah.
- [41:22]
Michael Saylor
If it's not destroyed, maybe the people have value if you get them to work for you. The gold, you know, has value, but the paper doesn't.
- [41:29]
Robert Breedlove
There's some examples of the opposite, actually. I think in Japan, they had the Norobedo laboratory, where they were running experiments, where they would bomb their enemy's territory with counterfeit currency. So they would try to go. The idea was to go and bomb, say, England with a bunch of counterfeit pounds so they could hyperinflate their currency and disable their economy. So it's like, not only do you not want the paper, but you try to actually inflate the enemy's paper.
- [42:00]
Michael Saylor
Yeah. I think that there's. There's a lot of examples where hostile governments would attempt to just counterfeit the currency of their enemy to destabilize the regime. But it doesn't get reported a lot in political history or even military history. And, I mean, some nations successfully did it to the US but we don't want to talk about it. Right.
- [42:23]
Robert Breedlove
Mm.
- [42:25]
Michael Saylor
So, you know, you won't. You won't read that much, but that's. It's an effective thing you could do well anyway. So I think. I think that that ends my thoughts on gold. It's. It's basically a metallic token, and it was our. It was our best idea. But it seems to have stopped working thousands of years ago. You could say a thousand, two thousand years ago, almost certainly. They had shared ledgers, and they just used gold as a method of final settlement. And we know that it failed at different points. We know that it was debased and resulted in the collapse of the Roman Empire. And so if Rome was the greatest empire on earth, when their final settlement network failed, then the empire collapsed. And what you have is just history, is the endless succession of successive empires rising up with a new gold standard that was not debased. And then generation after generation, the coinage of that next empire, the successor empire, would be debased, and then that empire would fail and collapse, and then another empire would come along, and they would start the cycle over and over again. And yet the myth of gold as immutable money, or the sovereign store of value, it stayed with us for thousands of years into the 20th century. I would say that the gold standard has been dying a slow death, a death by a thousand cuts. 1914 comes along. We've got the golden age from one of our 187 and 1914. But then World War I comes along, and then in 1914, every country abandons the gold standard, and maybe that's the final cut. And after World War I, the Treaty of Genoa, we came back to a gold reserve standard. And in essence, we had gold backing the dollar. And that degree of backing successively slid. So there was a debasement of the pound and the dollar consistently and gradually. And then, of course, the pound and the dollar became layer two applications, if you will. And then every other currency became a layer three derivative. And then everything else in the economy was built on those derivatives. So you had basically layers of derivatives of gold that got progressively less backed by tangible energy or denurtured, and that resulted in who knows how many collapses, the Great Depression, eventually you got World War II, which you could say came out of just a bunch of economic collapses like the Weimar Republic. And all the gold ended up getting centralized and seized by the Americans in Fort Knox. And then we wrapped Bretton woods around it. And Bretton woods was the second gold reserve standard of the century. Except this time it was just the dollar was the reserve currency backed some percentage by gold, say 40% or 30% by gold. And then every year thereafter it spread, slid from 40 to 30 to 20, I shudder to say. Right. It must have been less than 10 by 1971. And in 1971 we defaulted on the gold standard. In essence, at that point, the gold standard was. The gold reserve standard was effectively dead. Gold still has the fiction of being a store of value and an asset. And if you're looking for a non sovereign store of value between 1971 and the invention of bitcoin, you could have gone to gold. I guess you could have used property like land or commodities, timber rights, oil rights, something like that. And you could have used art. There's probably no one king, right? People dabble with. Is silver a store of value? I think the free market went back and forth, but it's pretty clear that gold died. It started dying. If not, it died as a store of value about 10 years ago, as far as I can see, when bitcoin was formed. And if we look at performance in the last 12 months, just for kicks, let's just go and look at 12 months of performance. So it's quite a day, right? In 12 months, Bitcoin is up 240%. Gold is down 9.82% over the course of 10 years, Bitcoin is up 132%. Compounded annual growth rate. Gold is 94 basis points. The S&P index is 13.9% over 10 years, 33% over one year. And summary, right. Is gold is not a store of value in the last decade. It's something opposite of a store of value. If the S and P is up 33% in 12 months, then a reasonable surrogate for the collapse of purchasing power of the currency in 12 months is the inverse of that. But you could say you need 33.7% more money to buy the same share of the S and P. Yep. So a store of value has to clock at 33% or better. And gold is minus 40% and Bitcoin is plus 200%. So that's the marketplace screaming at you that no one really sees gold as a monetary asset anymore except for the gold bugs.
- [49:09]
Robert Breedlove
Yeah. One of the key points that jumps out at me here is getting back to your framework of ideal money is that immutable quality necessitates a proof of work. And gold, again, was Just the best approximation of that. That's really the only thing that ever made gold money. Was this proof of work necessary to produce. It was just really difficult to produce. Therefore it minimized counterparty risk.
- [49:37]
Michael Saylor
It was the best token that you could work to produce that you could possibly mold into a coin, right.
- [49:45]
Robert Breedlove
But then lost relevance in a globalizing society because it wasn't fast enough.
- [49:52]
Michael Saylor
Not fast enough, not smart enough, not smart enough, not strong enough. Everything that lives in a Darwinian world has to be faster, smarter, stronger, yes, adaptive. You know, I. The cicadas came after 17 years and I saw them a month or two ago and they all come out of the ground at the same time. And I watched those cicadas fly around my home and I thought, those are the stupidest, slowest, weakest creatures I've ever seen. Sometimes they would like fly to a branch and they couldn't land on a branch. They were literally so stupid, they couldn't land on a branch. They could barely fly fast. They would, you know, a lot of them would just accidentally fly into the dirt and slam into the dirt. So when you looked at them and you compared them to other insects, you thought those other insects are so much better at flying, right? You never really, you never, you take it for granted, right? But you never think, oh, those birds are good at flying. They're fast and slow, strong and smart. Until you see something that isn't fast and isn't strong and isn't smart. And you say, well, this thing is pretty much, you know, history. How could it possibly survive? And the answer is they all have to birth once every 17 years and there's a million of them in the air and they're all so stupid and slow and inept that they're definitely going to die. But all the other creatures aren't going to be able to kill them fast enough to keep some of them from procreating.
- [51:29]
Robert Breedlove
The quantity of quality strategy.
- [51:33]
Michael Saylor
Yeah. And I think gold, it just eventually it fails because it's not strong enough, it's not fast enough, it's not smart enough, and the world goes to the next best thing and fiat arises, not because it's better than bitcoin, but because there is no such thing as cryptography and computing. So in a world without computers and without cryptography and without networks, you ask yourself, what are you going to do next? The answer is, I'm going to come up with a shared ledger. I do have math. We got algebra, we got calculus. I do have writing. I can create a shared ledger. And the IMMUTABLE part is going to come from the institutional credibility, the credibility of the proprietor and the reputation of the proprietor, whether that's a king or a mayor or an owner or religion. But the immutability and the credibility comes from institutional human source. And the greater the institution, the greater the monetary system. You have the greatest monetary systems of history associated with the greatest institutions, and then you have the weakest ones, all the way down to somebody on an 80 foot sailing ship in the middle of the Atlantic and there's a ledger and there's a quartermaster and there's 42 people and that's their money system and they're trading. It's a money system which is good for six weeks or eight weeks, but it is life or death for the eight weeks. And that is the fiat standard. And that's backed by the force of the captain. Right?
- [53:34]
Robert Breedlove
Yeah.
- [53:35]
Michael Saylor
You have a good captain, you might make it. And if you have a bad captain, there's going to be a mutiny.
- [53:41]
Robert Breedlove
Yeah, yeah, right.
- [53:42]
Michael Saylor
Maybe I was going to die.
- [53:44]
Robert Breedlove
It's a great framework. I love the framework of property and energy because there's also this deeper notion that most species are territorial, most social species especially, and that includes humans. I think we actually express and manage our territoriality through property. And so every little enclave, whether it's a boat on the ocean or a large piece of land, tries to control its most important form of property because it's an expression of managing its territory. And that's why we have these regional monopolies on money we call central banks. That was episode 10 of the Saylor series, titled the Death of Gold. I think Saylor did an excellent job firstly answering the question, what is money? And this is clearly a question with a lot of answers, but I think he's distilled it nicely into this concept of tokenized sociopolitical energy. Or I think, as he said, it was tokenized energy within a sociopolitical framework. In the first nine episodes of the Sailor series, we weren't really deep on the first principles of energy, anthropology and technology really building all the way from the Stone Age into modernity. In that series, one of the main tenets was that money is another definition of money was the highest form of energy a human can channel. This is very fundamental to the purpose of life, because what life is doing is it's channeling energy across space and time to try and satisfy certain aims, whether they be instinctual aims like those of plants or animals, or purposeful aims like those of humans. And this extra condition of putting it within A sociopolitical framework, I think, really frames it nicely insofar as what humans deal with in our actual existence in the world. The socio aspect of sociopolitical refers to social interaction, which I would distinguish this as trade, specifically voluntary exchange. So two market actors, two counterparties, willingly negotiating and executing a trade in a way that they both perceive themselves to be better off after the trade is completed. This is, in fact, how value is created in the world. I value the potatoes you have more than the apples I have to trade you value the opposite. Therefore, we both trade. We both believe that we're better off after the trade. And that's how really economic value creation works. That's clearly very important part of the sociopolitical term. The second part of that referring to politics or the political framework. We really have to look at what that term means. Political. In my mind, it is the imposition of one willpower onto another. Or you could say in the macro sense, an aggregate of human willpower onto another. And this involves coercion, frankly. It's a form of involuntary exchange, if you will. There's a great line by Clausewitz, who is a philosopher. He's a martial philosopher. So on warfare, and he says that, quote, war is the continuation of politics by other means, unquote. What he means by that is we essentially use politics as a mechanism for sorting out our differences in a way that hopefully prevents armed conflict or violent conflict, but often can lead to it. So within the realm of human affairs, we're basically dealing with two forms of exchange all the time. Exchange that we can enter into voluntarily, that creates value. But we also face the threat of involuntary exchange in terms of theft, taxation, inflation, confiscation, violence, anything like this. The point there, with money as tokenized energy in this sociopolitical framework. The whole premise of the sociopolitical framework is to create collective energy efficiency through trade. But it has to be done in a way that protects that economic enclave from involuntary exchange. That's what the purpose of government is, in fact, is to monopolize violence and coercion and compulsion. And protect market actors from those forces so that they can trade productively. Politics itself, then you could say it's premised on the threat of force. So this is an interesting way to think about it. Because politics is always a phenomenon in human affairs at a micro scale. But at a macro scale, if property could not be transgressed against. If your property could not be stolen. Or you could not be put to the point of a gun doing something, you would have much lower regard for the political leanings of others, you just ignore it, frankly. So politics has been very influential on human affairs precisely because property has been vulnerable to confiscation. And gold, in this lens, is no different. It was actually selected as money as a result of this confluence of cross purposes across history. Where people are. There's a game theoretic process going on where people are trying to hold the asset most resistant to inflation, dilution and confiscation in a medium that satisfies the other properties of money, like divisibility, durability, recognizability, portability and scarcity. So through that process, gold was selected and promoted as money because it was the least dilutable, most economically dense medium we had available to us. But it had many shortcomings, which Saylor brilliantly elaborates in this episode when we start to look at Bitcoin. It's the first digital money. And this may seem a bit complicated at first because we're all used to using electronic credit cards and we have online banking and whatnot today. But none of that money is natively digital, which means that its supply is not enforced in digital space. It's all a derivative of the central bank, frankly. The central bank is the arbiter of how much money is in circulation. To some extent, there's a bigger picture to that in the second and third tier banks, plus Eurodollar markets and things like that. But in general, the central bank holds sway over the money supply. With Bitcoin, we have a very interesting new tool and that we have a money that has perfected the mapping actually, between the sociopolitical and the energy domains. Again, the purpose of trade is to produce energy efficiency. Whoever does that, whoever's satisfying the wants of consumers more efficiently than others, is rewarded with profits. Those profits draw in other competitors. And that's how markets essentially, over time, lower prices and create innovation. And that's how competition, in a Darwinian sense, really sharpens us as both market actors and organisms. With Bitcoin, we have this mapping to the sociopolitical domain, but it's a mapping that's done in a way. The fixed supply of 21 million maps perfectly to the scarcity of time and energy, which is a thermodynamic reality, which is beneath the reason. It's upholding the reason for trade, for competition, for innovation. It's people or even a natural ecosystem, animals competing over scarce resources. The medium that communicates and coordinates the market process is money by definition. So we needed something that mapped onto the scarcity of time and energy and bitcoin does that perfectly. And that's why it's such a fundamental breakthrough. And as I've argued in much of my writing, a one time discovery. So with every other money, trust has always been necessary and trust in humans has been necessary to secure the network. And this is often, if not always, ended in corruption and failure. So Saylor lays out this kind of starting with the end in mind. If we had an ideal money in the world, what would that look like? And it would very essentially be, as we covered, a shared, immutable, mathematically correct and complete ledger. So again, if we're mapping purchasing power, which money holds onto the market actors that have earned it, there is no better ideal than that, than this shared, immutable, mathematically correct and complete ledger, this spreadsheet in the sky, if you will, that no one can tamper with. It's an interesting thought experiment because it's, it makes sense for what an ideal money would look like. And then it also overlays very nicely with what Bitcoin functionally is. This may be, as we're positing here, kind of an evolution in money. This tokenized energy and a sociopolitical framework has always been very vulnerable to, to politics, to theft, coercion, war, violence, all these modes of involuntary exchange. But it seems with Bitcoin that we may have perhaps evolved from a political monetary standard to an engineered monetary standard. So something much more like the second or kilogram, the metric system, some universal protocol that is shared and agreed upon by everyone and because of that, consensus cannot be easily tampered with or distorted. And that's a really big breakthrough in terms of human cooperation. Because again, this is. Money is the medium that binds us. You as a human may know 150 people on a first name basis, right? That's the Dunbar number that anthropologists have talked about. But we are connected to the other 8 billion people in the world through money. It is this medium that interconnects us through trade effectively. And if that medium can be distorted or twisted, then it corrupts these trade relationships and it breaks down the energy efficiency we derive from the division of labor. And that's largely what we're dealing with today, with central banks. So we zoomed out and looked at the history of money to really explain how gold has died or is dying a slow death. And one of the first places we started was coinage, which was introduced really to improve the divisibility of, of money, of gold and silver specifically, and to reduce transaction cost. Again, gold was this tool that was excellent for storing Value across time, but it was very limited in its ability to express value across space because of its physicality, its security costs, limited divisibility, et cetera. So coinage was introduced as a technological augmentation to overcome this insufficiency of gold. As Saylor said before, you can decompose money into the currency component and the asset component. So we could say that gold was an excellent asset and that it held value over time relatively well, but it was a terrible currency. It did not, again, currency like current, it did not flow well. It was not a readily transactable money, which limited its liquidity and transactability. So coins were this augmentation introduced to improve that. And coins were also an attempt, as Saylor said, to make authentication self evident. So this would have been aimed at reducing transaction cost in a trade so that every time you go to trade something for gold, you did not have to stop and weigh the gold and test its authenticity and run it through all these different techniques to assay it. You could save time, energy, and effort by relying on the. The issuer, whoever issued the coin, the seal that they placed on it would basically be a seal of legitimacy saying, this is 24 ounces, pure gold, whatever it may be. And you could just depend on the reputation of the issuer versus having to assay the gold at every transaction. So the intent of this, at least with coiners, was to radically decrease the transaction cost, which it in fact did for a long time. Another way to say this is that again, back to the five properties of money. This was intended to improve the recognizability feature, so people could recognize coins. They would know with a high degree of certainty that they were authentic and they could be relied upon without having to expend all these resources verifying them themselves. So what this gave us, again, if we're talking about this ideal money, this standard shared immutable ledger, a standard of value, if you will. Coinage was a step towards standardization. Different regional monopolies that controlled property in a certain area would issue their coinage and standardize it to certain denominations so that they could transact with very low friction, so you could keep the economic machine moving. But this standardization, we talked about standardization earlier in this series as well, and its relationship to monopolization, it comes at the cost of centralization. So you end up trusting that issuer. This one singular counterparty gains a lot of power over the entire economic network. And this gets you into system, I'm sorry, gets you into problems like the money changers every time you're transacting from one currency to another, they're going to take a little bit of rent out of that trade, which would be necessary, more and more necessary for a globalizing society as you have to trade across jurisdictions. There's another way to say that is energy loss every time you transform from one energy to another. This is true in the physical world, as true. It's equally true in the financial world as it is in the physical world, and importantly. And what really destroys gold's ability to serve as a good money is the fact that the economics of it force it to be centralized. You need this issuer so it can be more transactable across space. And with that centralization comes corruption. The issuer gains essentially absolute power over the money. And as we know, thanks to Lord Acton, absolute power corrupts absolutely. So we then went into some problems with the gold standard, and I think this is well described that we've covered why gold was selected as money. That again, as people are trading, trying to satisfy the wants of others profitably, you have a direct financial incentive to store those profits in a medium that cannot be debased, that you cannot be stolen from again. Gold was, of all the monetary metals, it was the one that exhibited the greatest scarcity. Another way to say that is it exhibited the greatest inflation resistance. Saylor describes inflation actually typically across history, at least over the past 50 years, I think longer as well. But the rate of gold inflation averages about 2% per year. So you know with relative certainty that you're only going to be debased or diluted as a gold holder at a rate of about 2% per year, which means your wealth's getting cut in half roughly every 35 years. But the advantage there, again, was its predictability. And Saylor, in his engineering mind, he describes it as the error rate, which I think is a great way to look at it. Gold was chosen as this mechanism for trade, as this medium for trade, because it had the lowest error rate. Anything else that you selected had a higher error. And therefore, if you chose it as a market actor, you would be selected unfavorably against in free market competition, Anyone that chose gold and you chose silver, you would effectively get out, competed because your money had a higher error rate than gold. But the caveat here, and this is very important with gold, is that that 2% is an average. It's not perfect. And in fact, it can explode, right? It can explode for a number of reasons. We could have an innovation, breakthrough, alchemy. Alchemists all over the world spent a lot of effort Trying to figure out how to synthesize gold from lead. If there was ever a technological breakthrough that gold could be manufactured in a lab profitably at a cost per ounce below the market price, that would be very devastating to gold, to the error rate of gold, the supply could explode and its value would implode. Or what we have actually seen historically are these discoveries like the gold bonanza in South America where all of a sudden these certain conquerors or explorers stumble upon a new stash of gold and then they sell it into the market. So that error rate, everyone's thinking it's 2% year over year inflation, well all of a sudden you can get a 20% year or worse. Finally, war. War very clearly can cause the market of gold to be flooded as well. For the same reasons. If one country conquers another and they go and liquidate their gold holdings, that can have a big effect on that error rate of gold. Which gets into another major problem with gold is that it's vulnerable to confiscation. It's more prone to physical theft, it's protected from inflation much more than fiat, for instance. But because it's a bearer asset and that essentially whoever possesses the gold is presumed to be its rightful holder as an asset, it's 100% equity and 0% liability. No one else has a claim on it. If I hold physical gold, that's it, it's a bearer asset. So when it is confiscated, because it's a physical bearer asset, if it is confiscated, that's it. You don't have recourse to anyone or anything to try and get it back. So that's a big problem and actually relates to gold inviting violence effectively. Saylor makes a point that you can firebomb the city, destroy everything, but the gold remains intact. It's a very durable metal. And at that point you really don't need, because it's physical, you don't need anyone's permission to confiscate it. So the physicality, we keep coming back to that being at the core of gold's problem. And it just doesn't hold up to our ideal standard of money. Again, the shared, immutable, mathematically correct and complete ledger. This thing that by definition has to be non corporeal, has to be intangible, non physical gold simply cannot be that. And in fact, what we've seen throughout history are attempts at the market to get closer to that ideal from gold. That was us abstracting gold into paper currencies or building credit systems or derivative systems on top of it, to make it faster, smarter, better, to make it more adaptive in a pure Darwinian sense. And the Achilles heel of that attempt to make gold more adaptive has always been humans. We've always corrupted the system. Whatever system we've created on top of has been corruptible. And since money is the most powerful incentive in the world, it has led to the corruption of every social institution that has tried to do that. The latest of which would be the central bank, which for the past 50 years has been completely unmoored from gold and we could say is essentially a fully fraudulent globalized currency counterfeiting operation as a result. So it's interesting that the institutions, the institutional configuration we have in the world, like we just mentioned, the central bank, is derivative of these technological limitations of gold. So it's like the tool that's so important for binding us together. Whatever limitations or failings it has, they actually manifest themselves in our socioeconomic systems. And that's it. Gold is just in a very matter of fact Darwinian sense where, what did Charles Darwin say? It's not the fastest, smartest, strongest or most intelligent species that survives, it's the one that's most adaptive. To change gold is simply too slow, dumb, weak, non adaptive, et cetera. It does one function really well and that is holding its supply expectations over time. When I say really well, I mean relative to everything else that we've had in the physical domain. But again, with the discovery of Bitcoin, we for the first time in human history have an asset with a guaranteed fixed immutable supply. And it can do that because of its non physicality. The fact that it's not physical means that Bitcoin can have this property of absolute scarcity. We couldn't do that with anything physical. It is impossible to guarantee the supply of any physical item, anything physical, subject to counterfeit. So we needed this mathematical competitive economic network to, to zero in on this shelling point, if you will, which is a focus point in game theory of a fixed supply. And there's constantly energy and effort being poured into that to secure it. In a world of endless Darwinian competition, even in the sphere of money, gold is simply not cut out to survive. And through that same lens, we could say that Bitcoin is very simply the apex predator of money, as many people have said. So that was it for episode 10. I'll see you guys back here soon. For episode 11, we're going to be diving into the failings of fiat.