This is an opinion editorial by Ansel Lindner, an economist, author, investor, Bitcoin specialist and host of “Fed Watch.”
Ghost money has a long history but only recently became part of the bitcoin vernacular via premier eurodollar expert, and bitcoin skeptic, Jeff Snider, Chief Strategist at Atlas Financial. We’ve interviewed him twice for the Bitcoin Magazine podcast “Fed Watch” — you can listen here and here, where we talked about some of these topics.
In this post, I will define the concept of ghost money, discuss the eurodollar and bitcoin as ghost money, examine currency shortages and their role in monetary evolution, and finally, place bitcoin in its place among currencies.
What Is Ghost Money?
Ghost money is an abstracted ideal currency unit, used primarily as a unit of account and medium of exchange, but whose store-of-value function is a derivative of a base money. Other terms for ghost money include: political money, quasi-money, imaginary money, moneta numeraria or money of account.
To many economic historians the most famous era of ghost money is the Bank of Amsterdam starting in the early 17th century. It was a full reserve bank, used double-entry bookkeeping (shared ledgers) for transactions, and redeemed balances at a fixed amount of silver. Ghost money existed on their books, and the money in their vaults.
The financial innovation of an abstracted ideal currency unit evolved because coins are never the same weight or fineness. Coins in circulation tended to get worn quickly, dented or clipped and even if the coins were in mint condition, sovereigns tended to debase the coins on a regular basis (by the year 1450, European coins only had 5% silver content). Ghost money is a currency abstraction based on a fixed measurement of a money (its store-of-value), but does not need to reference actual coins in circulation, just an official measurement.
To put it in terms Bitcoiners are familiar with, this layer of abstraction gave commodity money new security properties and payment features.
Security wise, ghost money avoids the problem of debasement to a degree (we could call this debasement resistance), because the unit-of-account is a fixed weight and fineness set by a bank, not the sovereign. For example, the Bank of Amsterdam set the guilder at 10.16 g fine silver in 1618. Coins in circulation at the time tended to differ widely, coming from all over Europe. There were even direct attacks on banks in the form of flooding the local economy with debased coins, as happened in the 1630s with the importation of coins of less silver content from Spanish Netherlands north to Amsterdam.
Ghost money also allows new features, like the ability to transact over long distances, in large sums, carrying only a letter, greatly reducing transaction costs. It also allowed longer-term bonds at lower interest rates because the unit-of-account is more stable. The pricing of shares (a new innovation at the time), also could be valued in stable currency units.
In general, ghost money leads to thinking of value in a stable abstract unit. This has far reaching effects that are hard to overstate when it comes to large long-term investments, like massive infrastructure projects, that just so happened to get going in the preindustrial era as well. Eventually, the thinking in stable abstract currency units would lead to all the financial and banking innovation we see today.
Ghost money is rightly thought of as a derivative to the money itself, one which replaced the insecure aspects of the physical coins, without getting rid of the underlying form of money. It would more properly be called “ghost currency,” because it is simply a stable derivative, an idealized currency, used for accounting.
Everything has a trade off, and ghost money is no exception. Abstracting the currency away provided debasement resistance from the sovereign, but it also enabled the banks to more easily create credit denominated in that idealized unit (fractional reserve lending), shifting the money printing task from sovereigns to banks. Expanding credit in the private sector according to market desires can lead to economic booms, but the trade off is the following bust.
In an article from Jeff Snider, he pairs the use of ghost money with the concept of monetary shortage to explain the rise of modern banking, and the beginning of the evolutionary process toward the current eurodollar financial system and even bitcoin.
“Any money-of-account [ghost money] alternative is the resourceful yet natural human response to these specific conditions.”
He sees ghost money as a natural market-driven practice, with a primary driving force being monetary shortage. Ghost money can add elasticity to the money supply as I stated above through credit expansion. He points to the 15th century’s Great Bullion Famine and the 1930’s Great Depression as two very important epochs in ghost money’s history. These were periods of inelasticity in the supply of currency, which incentivized efforts to search out new supplies via financial innovation (ghost money) or searching for new sources of money itself (silver and gold in the Age of Exploration and the eurodollar credit expansion in the 1950s and 1960s).
More than anything, though, what might have driven money-of-account forward to its preeminent position was something called the Great Bullion Famine. Just as the 20th century seemed to pivot in one direction then the other, from the deflationary money shortages of the Great Depression to decades later the overwhelming monetary changes underneath the Great Inflation, so, too, did Medieval economics suffer one to then pivot into its opposite.
Ghost money’s Golden Age, forgive the pun, coincided with the Bullion Famine. Quasi-money is often one solution to inelasticity; commercial pressures are not easily surrendered to something like a lack of medium of exchange. People want to do business because business, not money, is real wealth.
“The role of money, separated from any store of value desire, is nothing more than to facilitate such business[.]” — Jeff Snider
Snider frames ghost money as a market tool that happens to also provide a route to increasing the elasticity of money in times of currency shortage. In other words, when the supply of money does not expand at a sufficient rate, the ensuing economic difficulties will drive people to find ways to expand that money supply, and ghost money is a ready-made solution via fractional reserve.
Snider’s views put him squarely in the monetarist camp, along with Milton Friedman and others. They see in “the quantity of money the major source of economic activity and its disruptions.” Inelasticity is both the primary culprit of depression and the primary mover of financial innovation.
The Eurodollar As Ghost Money
“Necessity, basically, the mother of invention even when it comes to money […]But if the eurodollar was the private (global) economy’s response to restrictive gold, what then of the eurodollar’s post-August 2007 restrictions upon the very same? Where’s the ghost money of the 21st century to replace the preeminent ghosts of the 20th?” — Jeff Snider
Snider frames the eurodollar system as a natural innovation response to the inelasticity that prevailed in the Great Depression. In the 1950’s when Robert Triffin began speaking about this paradox, the market was busy solving it through ghost money and credit. The eurodollar system is simply a network of double-entry bookkeeping and balance sheets, using the global idealized currency unit at the time, U.S. dollars (backed by $35/oz of gold).
But is the eurodollar in its current form, still ghost money? No — it is credit-based money, but it looks almost identical.
Remember, ghost money is an idealized unit of money (in the past it was silver or gold). Credit is also denominated an idealized unit-of-account, a second order derivative, if you will. Through the dominance of ghost money, thinking in an abstract currency unit became common, and the psychology of the market changed to center around this new financial tool.
The difference between the current eurodollar, which is a pure credit-based system, and credit in a ghost money system is found in the store-of-value function. Ghost money’s store of value is from a base money (silver or gold or bitcoin). The eurodollar today, on the other hand, is divorced from base money completely, and backed by something new. A dollar today is an idealized measurement of debt denominated in dollars. It’s a circular, self-referential definition in the place of base money:
“Money-of-account [ghost money] was one such alternative which also blurred the lines between money and credit; in one sense, using ledgers to settle transactions even between merchants was under the strictest definition credit rather than a monetary substitute. But that was the case only insofar as eventually this paper IOU would have to be disposed of by bullion or specie.
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