Naked money: A revealing look at what it is and why it matters. Charles Wheelan, W.W. Norton & Company, 2016, 368 pages.
In Naked money, Charles Wheelan, a former reporter for the Economist and currently a teacher of public policy and economics at Dartmouth, outlines what makes money, money.
From the book jacket: “Consider the $20 bill. It has no more value, as a simple slip of paper, than Monopoly money. Yet even children recognize that tearing one into small pieces is an act of inconceivable stupidity. What makes a $20 bill actually worth twenty dollars?”
Understanding what digital currency is before investing in cryptocurrencies
Currency systems are critically important for overall societal stability. Up until now, currencies have been controlled by governments, usually through some form of central bank. This is overly simplified, but a central bank prints money and controls money supply to maintain the value of government issued currency.
In the past, currencies were generally backed by gold, known as the gold standard, or some other commodity. In 1971, the U.S. completely severed currency ties with the gold standard (other governments followed suit) and the dollar became a fiat currency, which means it has value because the government says it has value, not because it is backed by a commodity.
It’s the job of a central bank to maintain the health of an economy by growing or shrinking the money supply by raising or lowering interest rates, which can cause inflation or deflation. Too much of either one is not good.
Monetary policy is not glamorous, but it is super critical to everyday life. “This stuff matters,” writes Wheelan. “Monetary policy may seem esoteric. Then again, so did some of the weird derivatives Wall Street was peddling in the early 2000s. How did that work out? When monetary policy works well, we barely notice. We go about our daily lives using money that we take for granted, making use of a financial system that is not imploding, casting aspersions on regulators who seem to make everything more complicated. But it does not always work that smoothly. As the second half of the book will elucidate, getting money wrong can wreck economies and ruin lives.”
Currency wars and other timely monetary policy
While understanding monetary policy, and what kinds of indicators to watch to judge economic health (Wheelan writes about a Big Mac Index, a simple gauge of comparing economies based on the price of a Big Mac, which is made up of a bunch of different staple items), it’s also important to understand why monetary policy decisions are driving the adoption of cryptocurrencies.
In India, the European Union, Singapore, and elsewhere a “war on cash” is unfolding. This is happening because in those countries and regions, central bankers are trying to reel-in the money supply. The long term effects, especially in a cash-heavy economy like India, are unknown.
In the U.S. there is also a high level of uncertainty about the future of monetary policy and government spending and what impacts that will have on the overall health of the economy.
Uncertainty surrounding traditional currencies systems, especially if there are concerns about government meddling or heavy-handedness with central bank policies might drive interest towards decentralized cryptocurrencies.
Which leads us to cryptocurrency and the future of money
Towards the end of Naked money, Wheelan writes about the future of money, devoting space to analyzing bitcoin and cryptocurrencies. You’ll understand from his tone that he views the recent explosion in cryptocurrencies with a great deal of skepticism.
He reminds us, that for money to be money it must meet three tests: It has to be a unit of account, or a standard measure, that is understood; it has to be a store of value, meaning there has to be some faith and confidence that the currency will be worth roughly the same today as it was yesterday and will be tomorrow; and it has to be a medium of exchange.
Wheelan comes down hard on digital currencies as a money system, writing, “For most people, the attractive thing about bitcoin has been its steadily rising value. If you buy an asset primarily in the hope that it will rise in value, you are speculating. And if you are speculating on an asset that has no underlying value (profits or rents or some other stream of income), watch out for a bubble. The greater the fool theory — buying something today in the belief that someone else will pay more for it tomorrow — has had a seat at the table for every bubble in history of human civilization.”
Like other, similar arguments you might have heard, while not sold on the value of cryptocurrencies, Wheelan does see value on some of the other aspects of blockchain technology, particularly peer-to-peer payments.
To summarize: Naked money is a good read to understand how monetary policy works and how it’s a critical and often poorly understood mesh that holds governments and societies together. This is the third in the Naked series for Wheelan — he’s also written Naked statistics and Naked economics, and he does have an engaging writing style for what are pretty dry and dense topics.
But, if you are looking for a champion on cryptocurrencies saying how they will replace authoritative governments and bring peace and stability to the world, than this is not the book for you.
While I personally appreciate Wheelan’s perspective and knowledge on the topic, I’d be curious to see how his chapter on the future of money has changed since he wrote it (the book came out only a few months ago), and how it will change over time.