Broken Money: Why Our Financial System is Failing Us

In September 2022, a wave of normal people robbed banks in Lebanon.

What made these events more newsworthy than typical bank robberies was that most of these people were only robbing the banks to get their own money back. Due to a financial crisis in Lebanon, banks were not letting people access their own cash deposits for a long time.

One of the “bank robbers” that made headlines was a young woman who worked as an interior decorator. She held up a bank in Beirut using what later turned out to be a realistic-looking fake gun, to withdraw her family’s savings for the treatment of her cancer-stricken sister, since the savings had been frozen by the bank. This was perhaps the most striking example, but there were several other bank robberies during this period by people who just wanted their own deposits back, and some of them used real weapons.

These events in Lebanon are specific to a certain country and time, but they are part of a global story.

Nigeria, a country with over 200 million people, has experienced 13% annualized inflation over the past decade.1 They launched a central bank digital currency called the eNaira in 2021, which so far has had extremely low adoption, while cryptocurrencies (especially bitcoin and U.S. dollar stablecoins) have seen an order of magnitude higher adoption rate within the country despite being cut off from the country’s banking system. The Nigerian government subsequently deployed a set of policies meant to reduce the availability of physical cash and push people toward digital payments, which contributed to a period of political turmoil and riots.

Egypt abruptly cut its currency’s value in half relative to the U.S. dollar in autumn 2016, which eviscerated years of savings for a population of approximately 100 million people. In 2022 and 2023, the country again performed multiple sharp devaluations of its currency relative to the dollar, resulting in yet another halving of the exchange rate. I know people in Egypt that buy physical U.S. dollars on the black market and hold them as protection from this ongoing problem. They pay significant conversion fees to do this, while earning no interest on the paper dollars they hold. And when these devaluations occur, it immediately puts the onus on all employees in the country to try to negotiate higher salaries to recoup some of their lost purchasing power, since their ongoing salaries are denominated in the devalued local currency.

Türkiye and Argentina, both members of the G20 nations and with a combined population of over 130 million people, have been dealing with runaway inflation in recent years. Türkiye reached 85% year-over-year inflation in 2022 and Argentina reached well over 100% inflation in 2023.2

In the 1990s, Brazil experienced outright hyperinflation while it was the fifth most populous country in the world. When people imagine hyperinflation, they often picture 1920s Germany or certain failed states today, but a surprisingly large number of countries went through it at one point or another during the latter half of the 20th century. Just since the 1980s or later, people in Brazil, Argentina, Yugoslavia, Zimbabwe, Venezuela, Poland, Kazakhstan, Peru, Belarus, Bulgaria, Ukraine, Lebanon, and several other countries have experienced hyperinflation. Other countries such as Israel, Mexico, Vietnam, Ecuador, Costa Rica, and Türkiye experienced triple-digit inflation (i.e., nearly hyperinflation) within that period.

From 2016 to 2021, many sovereign bond markets in wealthy nations across Europe and Japan were offering near-zero or even negative nominal yields, and there was over $18 trillion worth of negative-yielding bonds at the peak.3 People had to pay for the privilege of lending to governments and to large corporations rather than receiving interest for doing so. The incentives of the financial system were therefore turned upside down. And then over the next few years, a global inflation wave severely reduced the purchasing power of the holders of those bonds.

Throughout the 2010s, multiple senior members of the U.S. Federal Reserve repeatedly said that the economy was below their average inflation target for too long and that they wanted higher inflation. During a congressional hearing in early 2021 when the headline U.S. inflation rate was 1.7%, the chairman of the Federal Reserve was asked by a congressman about the 25% year-over-year surge in the broad money supply (the highest since the 1940s) that had occurred due to recent fiscal stimulus efforts, and any potential implications it might have for inflation or the value of the dollar. The chairman dismissed these concerns, saying that such a surge in the amount of broad money likely wouldn’t have important economic implications and that we may have to “unlearn” the idea that monetary aggregates have an important impact on the economy.4

As price inflation began to seriously emerge later in 2021, the chairman initially brushed it off as being transitory and the Federal Reserve continued expanding the base money supply with quantitative easing. But then, as four-decade high rates of inflation emerged during 2022, the chairman and other leaders of the Federal Reserve panicked and completely changed their monetary policy, citing price inflation as the biggest problem to deal with. In their attempt to quell inflation, they raised rates so aggressively — and reduced the base money supply at a record pace over the next year — that they ended up creating over a trillion dollars’ worth of unrealized losses for banks on their Treasury securities and other low-risk assets. By sucking deposits out of the banking system at such an aggressive rate, they contributed to some of the largest bank failures in American history. By 2023, banks across the country had severely impaired capital ratios due to the sharply rising interest rates. For the first time in modern history even the Federal Reserve itself was running an operating loss due to paying such high interest rates on its liabilities relative to what it was earning on its assets.5 These Federal Reserve decisions affect the monetary conditions for 330 million Americans and billions of people in foreign countries and yet are made manually and subjectively by a group of just twelve people.

There are approximately 1606 different currencies in the world, each with a local monopoly over their own jurisdiction, and most of them have little or no acceptance outside of that jurisdiction. The global financial order is practically a barter system in this regard. A handful of top currencies are held as reserve currencies by other central banks and enjoy some degree of foreign acceptance, but they lose value slowly over time and have interest rates that haven’t kept up with inflation for years. Most of the other currencies are more prone to sharp devaluations, persistent periods of double-digit inflation, and occasional hyperinflations, while enjoying little or no foreign acceptance. For people in countries that are in the second group, they often try to get their hands on foreign currencies such as dollars to protect their savings, and generally can’t trust their local banks to hold them.

It can be a challenge to save money even in the most stable monetary jurisdictions, and if someone happens to be born in the “wrong” jurisdiction, it’s an incredible uphill battle.

How did we get to this point? Why isn’t our money better than this?

The global financial system has been broken for developing countries throughout modern history, and in recent decades it has built up serious imbalances even for developed countries. It’s no longer solid at its foundation, in part because its core technology is outdated.

I contend that the rise of populism throughout the United States, Europe, and several developing countries ever since the 2008 global financial crisis is in large part due to this fact. People on both the left and the right of the political spectrum can sense that something is wrong, that things are “rigged” against them, but can’t quite put their finger on why. A big piece of the puzzle is that the financial system as we know it isn’t working anymore.

We’ve seen in prior decades that global financial orders gradually fall apart due to the buildup of economic imbalances, the occurrence of geopolitical realignments, and the introduction of new technologies. When that happens, the old order gets partially or completely reconstructed and rebuilt into a new order, and examples of such occurrences are provided in this book. Most signs suggest that the financial order that we have been in since the 1970s is reaching its later years and is beginning its process of reconstruction and realignment.

This is a book about money through the lens of technological developments. It covers the evolution of money in the past, why the current technology and institutions we use for money are failing us in the present, and some of the possible solutions to the monetary problems that we now face. It’s written in plain language and is modular in its design, so that readers can focus on the parts that interest them the most.

Part 1 of the book walks the reader through ancient ledgers and commodity monies, to analyze why money emerged naturally and why certain monies outcompeted others. This helps us discern what the ideal properties of money are, and why these properties tend to reemerge time and time again independently throughout history. It also explores the relationship between social credit and commodity money to provide a reconciliation for two economic schools of thought that are often in opposition.

Part 2 is about early proto-banking services and the rise of full-service banks. It examines how various technological developments sped up monetary transactions and abstracted them away from the slower process of physical monetary settlements, which came with many benefits but also some drawbacks. It finishes by discussing how the increasing speed gap between transactions and settlements at the dawn of the telecommunication age gave considerable power to banks and central banks, since they became the primary entities capable of quickly transmitting money around the world.

Part 3 describes the global financial system as it has been structured since the early 20th century, including the geopolitics behind its creation and how it has changed over time. It covers the period of failing gold pegs around the time of World War I, the Bretton Woods system that existed from the 1940s to the early 1970s, and the Eurodollar/Petrodollar system that replaced it from the 1970s to the present. Finally, it explains how some troublesome aspects of the current version of the system have led to structural imbalances around the world in recent decades.

Part 4 analyzes the details of how money is created within the modern financial system and how debt inherently destabilizes the system over time. It then examines some of the imbalances and problematic incentives caused by constantly devaluing monetary units, as savers try to maintain purchasing power by buying other non-monetary assets instead. It shows how lawmakers have been empowered with a flexible public ledger to engage in warfare without taxation, to perform selective bailouts through the devaluation of other peoples’ savings, and in general to finance expenses in opaque ways.

Part 5 looks at digital monetary innovations in the 21st century, including Bitcoin, stablecoins, smart contracts, and central bank digital currencies. This is the most speculative part in the book, because it’s about the present and future, rather than about the past. It describes some of the new technologies that are available to us, and specifically looks at the various trade-offs and risks that these technologies come with alongside the opportunities that they can provide.

Part 6 explores the ethics of money and communication, which are the two components of commerce. It discusses the role of cryptography in general (a critical piece of modern banking and internet infrastructure), open vs closed financial networks, and the intersection of financial technology and human rights.

At its core, money is a ledger. Commodity money serves as a ledger governed by nature. Bank money serves as a ledger governed by nation states. Open-source money serves as a ledger governed by users. As the book explores, the evolution of technology changes the prevailing power structures and incentives surrounding money from era to era.

My background consists of a blend of engineering and finance, and I use a systems engineering approach when analyzing various aspects of the global financial system. Systems engineering is a multidisciplinary field that focuses on the design, integration, operation, and maintenance of complex systems over their life cycles. I treat the global financial system as the engineered system that it really is, and I have found that this method of analysis arrives at fresh conclusions that sometimes challenge conventional economic thinking.

My goal for writing this book is to help people better understand how money works, and why the global financial system is not functioning as well as it used to. The book is not just about why our financial system is not working well this year or this decade, but rather it is a deeper analysis of what money is, how we got to where we are now, and what the current foundational problems are.

I don’t have all the answers and can’t tell you what the world of finance will look like in the decades ahead, but what I aim to do in this book is to share what I’ve researched so that it may empower readers to find more answers for themselves. Politics can affect things locally and temporarily, but technology can affect things globally and permanently, which is why I analyze money primarily through the lens of technology.

This is not a gold book, not a banking book, not a bitcoin book, and not a political book. Instead, it is an exploration of monetary technologies in their myriad forms of the past, present, and future and touches on all of these topics and more, so that we might better understand where we came from and which paths we may take going forward.