Story Stream
recent articles

What if, in order to buy a house, you had to find upwards of fifty different coins weighing 9 kilograms in silver? In lieu of those, a gold coin would suffice but extremely hard to locate and then reasonably obtain given its tendency to be overvalued relative to the other precious metal. Being realistically left with only the first option, of the fifty there’d almost certainly have to be a mix of coins of all different types and spread across several nationalities.

Imagine the look on the home seller's face when you show up at the closing with the heavy burden of bullion.

Not ancient but Medieval history stretching upward toward the modern age and reaching right into the center of the current divides. Cash settlement versus some other way for completing transactions in commercial settings.

The more formal and rigid structure of currency and denominations is a relatively recent development. Even the names given the most prominent currencies, such as Britain’s pound, were measures of ghost money well before they were printed down on central bank paper. Fictional means of accounting had been developed a long, long time ago as a way of separating monetary functions.

Those are the means of exchange often linked with the unit of account both as often distinct from any store of value. In fact, it was the latter one which often caused so much historical trouble among the former pair.

In a 2015 paper written for the Banque du France, titled Enter the ghost: cashless payments in the Early Modern Low Countries, 1500-1800, authors Oscar Gelderbloma and Joost Jonker give us the following example as well as the one written above at the outset:

“In 1583 a Leiden merchant’s household possessed cash worth almost 670 guilders made up of 28 different coin types from the northern and southern Netherlands, France, Italy, Spain, and even Portugal.”

In order to patrol, so to speak, sufficient stores of value contained within them it became necessary to impede the straightforward ability to use cash in transactions. In addition to all that physical weight, there was serious uncertainty in the value of this plethora of often competing circulating issues, as well as at times severe restrictions upon simple availability.

Governments in Europe during the late Medieval period would regularly publish their politically-motivated exchange rates for a whole variety of coins circulating within their realms, both foreign and local. Setting perhaps no more than a baseline level, market prices would fluctuate based on on-the-ground considerations including just basic supply versus demand for such cash.

Let there be ghosts.

Technically money-of-account was not, strictly speaking, some spectral deviation from legitimate means. Also known as “ghost money”, this was a long-developing historical innovation which reached its prime around the 15th and 16th centuries for several reasons only beginning with the cash settlement issues.

Advances in bookkeeping and shared ledgers, these made possible an essentially cash-less regime where merchants might secure commercial transactions based upon nothing more than reputation. Perhaps merchandise or property collateral.

The “ghost” in each was how these would be measured avoiding the use of so many current coins then in common rotation throughout each city or region. Harkening back to more purely “devout” coinage, this paper (or virtual) system would be measured against “ideal” coins no longer in circulation.

Accounting conventions rather than actual physical money exchanged.

These ghosts took their origin from the longstanding mint practice of denominations starting from a root pound of silver (occasionally gold). These were merely reference units by which paper-settled transactions could be assessed, along with differentiating the values of coinage actually available at those times.

An example:

“…during the fourteenth and fifteenth century the city of Deventer had several fictive units, ghosts remaining from gold coins long gone but, similarly to the pounds of silver, really serving as set weights of bullion against which to value circulating coins.”

What drove this quasi-money genesis were the contemporary monetary conditions surrounding the downside of hard money store-of-value cash. As today, people back then weren’t thrilled with the prospects of transacting in cumbersome, even dangerous ways (the necessity of transporting and storing highly-valuable physical tokens made the transporter and receiver a pretty significant target for thievery and worse).

More than anything, though, what might have drove 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.

The famine is one well-known impetus behind what became the Age of Discovery; it’s what set Christopher Columbus off desperately seeking some other way to India because, for one reason, Europe badly needed gold.

Scholars have argued and debated the causes and effects of the shortage in Europe ever since it showed up. One theory has it that silver mine production tailed off dramatically especially after the 14th century’s Black Death, with that also decimating the skilled labor force, forcing essentially a balance-of-payments shortage with Asia and the East. The latter supplied renewable goods for which Europeans could only offer up hard money not replaced from new stores or supplies.

Thus, why Columbus would want to more easily travel to India to get some of that money back.

Others argued the silver shortage led to mispricing, really repricing, overvaluing hard money relative to deflationary goods (and labor) prices, which incentivized widespread hoarding of precious metals money in the form of artwork, religious idolatry, or luxury items. Each would only temporarily de-hoard whenever local prices created profit opportunities.

Whatever the cause, the European continent was starved of hard money, sending Columbus on his voyage and the Spanish who followed seeking golden cities in the Americas, while Portuguese explorers set sail down the African coast searching for any untouched stores of silver.

These efforts literally paid off such that what followed the Great Bullion famine was an era of “easy” money characterized by often rapid price inflation – and Copernicus’s famed quote (1517, Monatae cudendae):

“We in our sluggishness do not realize the dearness of everything is the result of the cheapness of money. For prices increase and decrease according to the condition of money.”

Stepping back, scholars have convincingly linked the preceding money shortage with what has been characterized as the longest economic depression in history. Maybe not uniform, not everywhere all at the same time, certainly much of the 15th century, in particular, can be reasonably categorized by that term.

And it also took on familiar depression proportions in other ways, by what was in abundance: war, destruction, societal upheaval, even demographic issues. As today, there remains significant debate about which caused what; did the money shortage exacerbate those “real” economy issues, or did the depression introduced by the bullion famine trigger the background conditions which led to them?

This would be a question asked repeatedly under similar conditions, including the 1930’s in the US and the rest of the world. One thing we do know, and what the cited paper focuses on, is that in the absence of steady money supply commercial and financial agents will seek alternative methods for payments.

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; as wildly popular 19th century economist Henry George admonished, avoid every impediment in the mechanism of exchange by whatever means.

Money-of-account 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.

What if a merchant system merely traded the paper IOU’s, and did so on a form of widely shared ledger?

This was not a theoretical “what if.” Rather, ghost money regimes quite often depended upon commercial participants keeping the same set of books and by doing so increased the level of familiarity, overcame information asymmetry, and therefore greatly facilitated the reach and power of this essentially reserve-less yet steady and dependable monetary arrangement.

Furthermore, given that this money elasticity was tied directly to real economy needs – the actual exchange of goods and sometimes services – it effectively functioned like a “real bills” doctrine policing inflationary tendencies and keeping them at minimum. Subprime mortgages and their ancient equivalents became possible where specie was in overabundance, yet perhaps counterintuitively far less likely if not completely impractical using only ghosts untethered to hard money.

This situation, and I hope this has become obvious, very well describes the outlines of what would become the eurodollar system. Derived not in response to a bullion famine, maybe only a bullion restriction whose regime, Bretton Woods, was unexpectedly way too restrictive. John Maynard Keynes like Harry Dexter White wished for a sound backing for the post-war system, yet even they never anticipated the huge tide of globalization and the need for broad availability of a common currency worldwide.

What was the eurodollar if not an updated form of ghost ledger money? As I so often write, the eurodollar developed almost exclusively along the lines of the first two monetary roles: medium of exchange and unit of account. Practitioners cared little about store of value since the system easily offloaded that chore to related financial markets.

Necessity, basically, the mother of invention even when it comes to money which many still today claim the sole province of governments. Not so. Never so.

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 21stcentury to replace the preeminent ghosts of the 20th?

Is it not right under our noses?

In one sense, right off the bat, crypto currencies are misconceived for what are these gross misunderstandings. Even Bitcoin’s genesis block, written by the famed but pseudonymous Satoshi Nakamoto, contains this very error:

“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.”

Not only that, more recently last year, “onto” block 629,999 its miner “scribbled” an homage:

“NYTimes 09/Apr/2020 With $2.3T Injection, Fed's Plan Far Exceeds 2008 Rescue.”

This forms the basic argument of so-called Bitcoin maximalists who see particularly the Federal Reserve but really all central banks as having set loose to “money printing” excesses. They’re killing their currencies by creating too much, and cryptos are the offered antidote to “devaluation.”


It is, point of fact, the opposite. Just like the bullion famine, what crypto enthusiasts of all kinds are reacting to – and basing their buying of digital currencies on – is the central bank response to an otherwise severe and constraining monetary shortage. The Great Eurodollar Famine has been so the opposite of great because of its deflationary consequences including the illusion of central banks trying, and failing, to do something about it.

Digital ghost money for a new age of shortfalls. And they are being kept alive by the necessities of it, even as those at the margins who know little about them are diving headfirst into the crypto space for all those wrong reasons. These latter only hear about how the dollar is “being destroyed” and how Jay Powell and Uncle Joe are about to lead us down the destructive inflationary path.

But – and we just did this a few years ago – those things never happen. In 2017’s Bitcoin bubble, exactly the same. Its price in dollars went parabolic along with a clear bubble in digital offshoots, now-forgotten ICO’s, the frenzy never lasted long because the premise behind its price surge was entirely faulty.

Once the dollar instead caught its Euro$ #4 bid, renewed acute shortage, Bitcoin’s price sunk like a rock.

The technology did not disappear; on the contrary, it has proliferated into many, many different forms because there remains the same need even if so few identify exactly what that is. The world is attempting to reconcile that which it doesn’t understand – money shortage – with the misunderstood symptoms far more easily observed.

Almost elegantly, the end result the same anyway.

I make the analogy of Pythons having been introduced into the Florida Everglades (a sad development) many years ago: despite everyone’s best efforts, including concerted measures by the government at all levels, once set free into the environment the serpents only proliferate because that particular environment was absolutely perfect for them.

The same with crypto in a key sense; the economic environment is only-too-ready for the next ghostly innovation, even if those forwarding it get its reasoning backward, as demonstrated yet again nowadays by the excessive dollar-is-dying nonsense once more pushing prices back and then well above 2017 bubble excesses with few having learned much about what really took place in between.

So, despite the best efforts of governments (only cautiously inching into their distaste for it) and those investors piling into them and making them look ridiculous and unsuitable when doing so, digital platforms like Everglade’s pythons are sure to stick around anyway because the environment is as-if tailor-made for them.

Governments, contrary to popular opinion, the same which ironically dominates the digital space, they don’t really control effective currency. They can at times, but throughout much of history it’s been in the hands of private associations which are only boosted when effective money becomes hard to source.

In that way, the monetary wrongness of the last fourteen years has unsurprisingly unleashed merely the next ghost innovation. That it has proliferated, however lumpenly and clumsily here and there, likewise no surprise. And as history has repeatedly shown, it does take time for these ghosts to find their way, to take real hold and offer an elasticity outlet otherwise unavailable. In doing so, this leaves the economy vulnerable to further suppression, driving even more intense interest.

During the Great Bullion Famine, hardly anyone knew its cause, either – as I mentioned before, even today there’s good and compelling debate. Any money-of-account alternative is the resourceful yet natural human response to these specific conditions.

Crypto bubbles, absolutely, but that likely to be, in my view, a minor if ugly detail in an otherwise very familiar, ultimately successful longer-term story. 

Jeffrey Snider is the Head of Global Research at Alhambra Partners. 

Show comments Hide Comments