Adam Tooze on Macrofinance and “Fully Political Money”

One of the aims of The Crypto Syllabus is to gently nudge our public intellectuals to take cryptocurrencies and their associated technologies (such as the blockchain) seriously. To his credit, Adam Tooze, one of the finest economic historians at work today, needed no such nudge from our end: in March 2021, he already penned a short essay about cryptocurrencies for his excellent newsletter, Chartbook.

One of the most interesting things in the interview that follows is Adam's critique of the belief, shared by many crypto-enthusiasts, that fiat money is not backed by anything. As a veteran observer of the recent financial crises, Adam is well-positioned to note the role that macrofinance plays in "backing" fiat money as we know it. As he puts it below, "What backs money is the entire gigantic apparatus of macrofinance. It is backed not just by 'everything' but by 'everybody,' or perhaps one should put it more precisely, by 'everyone who is anyone.'"

This remark points to a certain one-dimensional formalism, which I've noted in other discourses that circulate around crypto. These technologies do present solutions to institutional deficiencies and problems of various kinds. However, their account of the underlying institutions that generate them either is extremely simplistic, grounded in all-too-rigorous interpretations of formal definitions (e.g. "fiat" = "no backing"; "governance" = "voting"; "institutions"= "entities with an org chart"; "law"= "contracts"). Perhaps, a closer, attentive engagement with the discipline of history – Adam's specialty – is the way to fill in these analytical gaps.

~ Evgeny Morozov

EM: Before we delve into the specifics, perhaps you could give us a short outline of how you read cryptocurrencies and their broader political and economic import. Are they money? Why or why not?

AT: In a simple functionalist way, you can define the role of money as consisting in some combination of three things: means of payment, store of value, unit of account. Clearly, in certain circuits folks have begun to price things in cryptocurrencies – NFTs, digital art objects, etc. – so crypto is serving as some kind of unit of account. But crypto is not a particularly useful unit of account because its value in terms of other units of account fluctuates so much, which also means that crypto is a bad store of value (unless you have a high preference for speculative gambles) and is unlikely to become widely accepted as means of payment. (In an upswing, the risk is that, in using it, you undervalue your tokens. In a downswing in crypto prices, only a highly risk-tolerant merchant would accept payment in crypto, unless at a large discount.)

If we depart from such functionalist accounts of money and stress instead the role of money in constituting community, founding polities, etc., then crypto has clearly gained purchase in certain communities and helped to configure and constitute them. The question then is, how stable, robust, and widespread are these social groupings that have organized themselves around this money and/or how powerful are their opponents?

EM: In one of your newsletters from March 2021 – your first public foray into analyzing crypto – you cite Gramsci and write that “crypto is the morbid symptom of an interregnum, an interregnum in which the gold standard is dead but a fully political money that dares to speak its name has not yet been born. Crypto is the libertarian spawn of neoliberalism’s ultimately doomed effort to depoliticize money.” Could you expand a bit more on what this “fully political money” might look like, perhaps by contrasting it with the money that we have now?

AT: I should admit upfront that the idea of a “fully political money” is nothing more than an aspiration, a telos, a direction of travel. Indeed, you might ask whether we can live with anything that is “fully political.” After all, our politics regularly lurches into anti-political foundational gestures, not dissimilar to the gestures that we make when we try to found money on gold, or central bank independence, or a mechanical monetary policy rule, or an algorithm.

In this sense I absolutely agree with my friend Stefan Eich when he says: “there [have] always been hysteric pronouncements about the fragility of fiat money, but… we might actually want to look at these voices as themselves part of the politics of money.” The politics of money includes an anti-political strain.

After all, the same goes for the law, which I would think of as the closest we have to a fully political architecture of social organization. In the limit, all too often, legal structures seek to anchor themselves in some more solid foundation than that provided by more or less widely accepted and deliberate societal agreement. Constitutions reach for god, or nature, to do the work for them. Perhaps we cannot do without such gestures. But that is what I am gesturing to: the possibility of organizing ourselves around money that is accepted for what it is, i.e. a conventional set of arrangements ultimately arising out a complex of social and political interactions, part of the material constitution of our society, warts and all.

EM: I get what you say about neoliberalism’s influence on crypto and the connections you draw to the broader Hayekian vision for denationalizing money, which Stefan Eich so brilliantly documents in his essay and his forthcoming book. But I think there’s a second source of legitimacy – from the left – for many less visible but, perhaps, more ideologically important crypto projects, which is often ignored by such critics. For many decades now, the ideology of what we can call “localism” captured the imagination of the left, especially of those currents that look very favorably on the communitarian legacy of the early 1970s: these are people who celebrate cooperatives, time-banks, and, inevitably, alternative and complementary currencies (here I’m thinking especially of Peter North’s book Money and Liberation).

I wouldn’t say that these movements criticize the state the exact same way that the neoliberals do; they do complain about hierarchical, rigid, and bureaucratic structures – but it’s mostly a humanist rather than economic critique. A lot of this passes under the banner of “solidarity economy” or “alternative economy,” and it’s not very hard to see how this would fit into a conception of a post-capitalist society that is more decentralized, more autonomous, and, perhaps, more democratic. To start with, most of these “alternative economies” operate on tokens – so a shift to crypto is quite natural. I myself am critical of such localist tendencies, as I find them unable to offer any counterpoint to the likes of BlackRock or Amazon. But I can easily see how the crypto allows them to revive many of those earlier utopian undertakings and package them in a much more innovative way. What do you make of such efforts in general? Should this “fully political money” that you advocate be global rather than local in outlook? Are people trying to find localist uses to crypto mostly living in a fantasy world – not that different from, say, ethical consumption?

AT: Actually, I have a lot of sympathy for that kind of local money project. After all, it explicitly recognizes the societal project or counter-project it is involved in and I happen to be more sympathetic to its politics than that of the libertarian, anarcho-capitalists. If we are trying to think through what a fully political money entails, then we cannot shrink from political judgment. That is what makes it so disconcerting as an idea. If money is a tool of collective organization then it is the purposes of the collective project that are first and foremost important. What I regret about some localist visions is not the localism as such but the idea that localism should then be tied to a foundationalist move, i.e. to something which is in fact not part of the community at all, but outside it.

Furthermore, even local monies are going to need monetary policy. As a good Keynesian I can never forget Paul Krugman’s analysis of the babysitter community and the liquidity trap suffered by the Capitol Hill Babysitting Co-op. Small scope promises no escape from politics. And that should not be regarded as a curse but rather the opposite, an opportunity for collective learning-by-doing and experimentation. That is another way of putting the essential point. Monetary policy is not a curse to be driven out by some non-political binding mechanism, algorithmic or otherwise, but an opportunity to expand the range of our politics and collective self-organization.

What backs money is the entire gigantic apparatus of macrofinance. It is backed not just by “everything” but by “everybody,” or perhaps one should put it more precisely, by “everyone who is anyone.”

EM: The whole new field of “cryptoeconomics” seems to ignore the macro-level and just focuses on getting the Homo Economicus to behave through better-designed incentives… If one were to write an intellectual history of cryptoeconomics, it’s going to be almost exclusively dominated by mechanism/market design and game theory, its non-existent macro-economics stuck in denial somewhere between the extremes (all on the far-right) of someone like Murray Rothbard and his libertarian opponents who preach Free Banking. This ignorance of the macrofinancial is premised on what seem like wrong-headed ideas about the nature of fiat money and it not being “backed” by anything… Could you briefly tell us why in your opinion the standard crypto critique of fiat money makes a mistake in ignoring the ways in which the structures of macrofinance actually do back, say, the US dollar?

AT: Well it is a vertiginous realization isn’t it? That money is not backed by “anything.” I’ve shocked year after year of smart college students by forcing them to face that reality. There are always a significant minority who cling to some version of the gold standard. They actually do believe that when you “take the note to the central bank,” you will get “something” in exchange. It’s not an easy idea to give up. It’s not unlike the vertiginous feeling that is engendered by realizing that language is not “backed” by anything. We are familiar with solutions to this problem. Create a physical object that can be used as a reference for a word, a definition, a standard, etc.

But then I also find that it is not difficult to reverse the flood of skepticism and nihilism and simply reply: "No. Money is not backed by 'any one thing.' It is far better than that. It is backed by 'everything.' What backs money is the entire gigantic apparatus of macrofinance. It is backed not just by 'everything' but by 'everybody,' or perhaps one should put it more precisely, by 'everyone who is anyone.'" Or, if you are headed towards state theories of money, you can add and what really matters is that it is "backed by the one power that matters," i.e. the people with coercive power.

That generally induces a sense of relaxation. "Ah, yes…"

But if this is a fair account of the emotional politics of money, it is also diagnostic. In the background of true believing cryptothought is some kind of model of societal collapse brought on by irresponsible politics, either democratic or authoritarian. This is a line of thought that goes back at least to the 18th-century theorists of modernity, Hume et al. The best (truly deep) book on this is by Mike Sonenscher, Before the Deluge.

Not for nothing, in theories of sovereign debt we speak of “original sin,” i.e. the ability of sovereigns to default without serious penalty. In the fear of fiat money lurks a fear of original sin. And in the modern, secularized world there lurks in that space the fear of the famous openness of “the political” as diagnosed by Lefort, Gauchet, and company.

At the global level, we are a very, very, very long way from Bitcoin et al. challenging the global hegemony of the dollar to the point at which one could talk about a broader systemic effect.

EM: We have interviewed Andres Arauz, the former Ecuadorian minister who also ran in the presidential elections last year. One of the salient points he made with regards to Bitcoin and cryptocurrencies in general is that they do undermine, in a way, the bargaining power of the IMF and the US as well as the dominance of payment systems like SWIFT (which are often used as a bargaining tool, as we have seen during the war between Russia and Ukraine). Is there, perhaps, a charitable reading to be made of crypto as unwittingly helping the anti-systemic forces, many of them on the left, even if the underlying crypto-assets are designed and promoted by ardent libertarians, mostly in the US?

AT: Presumably we would want to distinguish different types of anti-systemic effects and also ask what kinds of new systemic risks and new hierarchies of power might emerge in a world in which crypto was more prominent. The issuance of central bank digital currencies or the creation of alternatives to SWIFT may indeed be part of a sovereigntist strategy. They are an update of classic strategies of economic sovereignty for a digital age. At the global level, we are a very, very, very long way from Bitcoin et al. challenging the global hegemony of the dollar to the point at which one could talk about a broader systemic effect. And one should surely expect regulators to crack down hard, well before we reach that point. Meanwhile, various types of asset-backed crypto generate their own hierarchies and their own risks of financial instability and thus financial compulsion.

EM: Related to this, how do you assess El Salvador’s move to issue Volcano Bonds? We have heard quite a wide variety of opinions on it. If we were to once again be charitable, by what logic could we say that, say, Varoufakis’s flirtation with starting his own digital currency in Greece was a clever bargaining tactic in negotiating with the European Commission but Bukele’s flirtation with Bitcoin bonds is not? Would you condemn both as populist and irresponsible? What if Bukele’s stance does help to secure more favorable conditions from the IMF though?

AT: A digital central bank currency, or digital Treasury-backed currency is a totally different beast from a situation in which a small, vulnerable country hitches its bandwagon to a highly speculative and volatile vehicle for private speculation, which is what Bitcoin is at this point. Why does it make sense for El Salvador, given its desperate need for infrastructure, to borrow $1 billion, half of which will be invested in an asset (bitcoin) whose value to the dollar has fluctuated since the spring of 2020 by a factor of almost ten? Will you end up with $500 million, $5 billion, or nothing? Only a truly desperate situation would warrant such a gamble. Unsurprisingly, El Salvador’s outstanding dollar debt sold off hard on the news. So there is real risk of collateral damage here.

EM: It’s common to hear that the rise of crypto is a direct consequence of the global financial crisis of 2008, a subject on which you’ve written extensively. On the one hand, given the historically low or even negative interest rates, investing in Bitcoin or Ethereum does seem like a way to make some non-trivial returns in an economy that no longer works for retail investors. (I’m not saying I buy this argument, as whatever these investors are losing in bonds they can recuperate on the stock markets and via ETFs but this argument does get made a lot.) On the other hand, given the post-OWS and post-Tea Party atmosphere of distrust in the financial system, it’s logical that people would buy into the idea of trustless money, where all the political work is done by the blockchain. As such, the mainstream appeal of crypto is a useful barometer of distrust towards both central banks and Wall Street. Short of a vast crypto crash, do you think that there is a way back to those pre-2008 times, when the trust in both public and private institutions of finance ran a bit higher? Wouldn’t one say that the Covid-related bailouts – a form of escalating neo-feudal plunder, if Robert Brenner is to be believed – only reinforced this broader distrust and now there’s surely no way back? Could CBDCs do the job of restoring this public faith somewhat?

AT: I don’t disagree with that broad diagnosis. All sorts of morbid symptoms are appearing at this moment, hence the appeal of the famous Gramsci line. But we should see them for what they are and put them in context. They are morbid symptoms, confined to a small but very vocal minority, particularly vocal in the tech/social media space, so they grab a lot of attention. As to the more general explanatory framework, if you look at data for trust in the Fed, then the collapse in confidence actually happened not after 2008 but under Greenspan, after dot.com.

And in Europe, despite the nightmare of the Eurozone crisis in which the ECB was largely culpable, confidence in Eurozone institutions is fairly high. I discussed some of the more recent research on that issue in my newsletter (Chartbook #62). This shows remarkably high levels of confidence in the ECB across the Eurozone, and strikingly most of all in the hard currency Northern European countries that you might expect to be most tempted by anti-fiat tendencies. Standing even further back, I take issue with Brenner’s simplistic account of the 2020 crisis response. I laid out my alternative interpretation at length in Shutdown. But that is for another time.

EM: There are voices on the left who insist that the democratization of finance epitomized by the rise of Robinhood-like apps (and, to some extent, many crypto infrastructures and assets) is something that progressives should be exploiting rather than condemning. This ties, somewhat, to the long-running efforts to, say, have workers play a greater role in deciding how pension funds invest their money; have the citizens of Norway more actively shape the activities of the country’s sovereign wealth fund; etc. So one can envision that, instead of dumping all these new crypto riches into NFTs, progressive organizations can, in fact, form their own financial vehicles in order to support progressive causes and also, perhaps, ensure that there are other criteria – beyond just profitability – that are taken into account by the cabal that is the world’s leading credit agencies. Some intellectuals and academics – I’m thinking of Michel Feher and Robert Meister – have made such arguments in the past. Do you think this is a viable project, especially if one considers what is already going on in the ESG space and the “social turn” by the likes of BlackRock and Vanguard? What I find so intriguing about such proposals is that they don’t advocate philanthropy – so you make money through hedge funds and then redistribute through foundations, the way, say, Soros has done – but they actually want to make money through finance and then also use it for political battles that are enacted through finance itself. Any thoughts on this?

AT: In Shutdown I described the Robinhood bros as the people who in the spring of 2020 “connected up the dots.” Rather than waiting for radical monetary politics to deliver central bank accounts for every citizen and people’s QE, they took their stimulus checks and dumped them into the stock market and thus rode the same escalator as the better-off investors courtesy of the Fed. There is an argument for investing a larger share of pension funds in the stock market, precisely so as to secure some of those gains. The risk, of course, is that it becomes a privatization boondoggle for overpaid fund managers.

One solution is index funds. But this kind of public investment is precisely what the big Sovereign Wealth Funds do. One can even make a case for making such bets on a leveraged basis. You don’t have to wait for a fund to accumulate before you speculate. “Only suckers do that.” Borrow money on the strength of future flow of contributions and invest that. What you would need, of course, is a safety net, hedging, all the usual safeguards. But let’s be clear, the entire American university system – in which so many of the folks contributing to this debate earn their living – operates on this basis. What do people think sustains the luxurious grants and conditions in graduate school in the US? In the inner circle of elite schools, both public and private, it is, to a considerable degree, endowment income generated in precisely the manner you describe. It is a two-way relationship. Yale’s endowment is one of the most highly rated investors. They have access to the most exclusive circles of unconventional assets, private equity, etc. And if you believe Coindesk, Harvard, Yale, and Brown have all been buying crypto.

If you think that money as we know it is backed by nothing, why do you think Facebook is so interested? After all, what is Facebook “backed” by?”

EM: Do you think that the rise of crypto might, paradoxically, reinforce China’s standing on the world stage? It took the most drastic measures to regulate crypto currencies; it moved very fast to introduce its own state digital currency, the e-yuan. Previously, it moved very aggressively to regulate FinTech and digital payments. Sure, its economy has its own problems like Evergrande, but, overall, it seems to be taking steps to limits its exposure in the eventual crypto-collapse but also to free up its hands when it comes to public policy in the monetary realm: they don’t want to share their monetary sovereignty with Alibaba, let alone Bitcoin or Ethereum. Do you think this strategy would eventually be vindicated? And what do you think of central bank digital currencies in general, and of the Digital Euro in particular?

AT: Central bank digital currencies seem to me an entirely logical development of the fiat system for the digital era. In fact, I struggle to understand the difference between what is proposed with such fanfare and the systems we already have in place for all large transactions. Clearly, in China’s case the aim is for something truly transparent to the state and the regime. In their case, this is particularly dramatic, not only because the regime’s ambitions to control are so sweeping, but because their entire banking system as we know it today, the entire gigantic edifice, is only 25 years old. So, the fear that haunts the West, that digital currencies could render private banking institutions irrelevant, has a more dynamic, historical character in China. Perhaps commercial banking there will be a brief interlude. It seems that concern for the profits of the incumbent private banking system is one of the main reasons not to push forward rapidly in Europe and the US. The banks will threaten us with “stability concerns.” Those claims seem like something we should investigate critically. Perhaps digital central bank currencies are interesting precisely because they offer us a way to change the terms on the incumbent financial system, not as a private venture (as with crypto) but as a public enterprise.

EM: The US and Europe are not China and such drastic measures are not very feasible, at least not in the short-term. What do you think the regulatory priorities should be and how feasible are they to implement, at least in the US, where some of the senators charged with regulating the crypto-industry have been found to be active investors and traders in it themselves? As we could see from the confirmation hearings of Saule Omarova, both Democrats and Republicans get very itchy when it comes to anyone with a more adversarial position with regards to both crypto and Wall Street… So it’s hard to imagine Robert Hockett’s ideas around the Democratic Digital Dollar getting much traction in Congress…

AT: Indeed. Apart from passing legislation to prevent active trading by elected officials and Fed staff, the priority should be to ensure that crypto models like Tether do not generate serious run risks. They are supposedly asset-backed. They are, for all intents and purposes, a hybrid of banks and ungated funds, which themselves are too much like banks. They need to be regulated as actively and thoroughly as banks, more so given their limited track record. 2020 revealed once more how dangerous the risks in the shadow banking system continue to be.

EM: Do you think we are too quick to write off Big Tech – the likes of Facebook and Google and Amazon – when we think about the future of money? In theory, they do have far more resources, technological know-how, and already existing technological networks (e.g. WhatsApp) through which to conquer the consumer market. Facebook has had a rough start with Libra (now rechristened Diem) but it’s still very much alive. And the European Parliament even issued a report, back in 2019, saying that “synthetic central bank digital currencies” – a public-private partnership of sorts – whereby the likes of Facebook will get to run these officially-sanctioned stablecoins in exchange for access to the central bank reserves. Do you find this vision plausible, especially given that, when situated against crypto, Big Tech look like angels?

AT: Big Tech is an established, dynamic, rapidly growing global power. I agree that putting them in the same pot as insurgent, two-bit crypto makes no sense. But for the same reason, we should be intensely vigilant with regard to any project to extend the already immense grip of the likes of Facebook, Google, and Amazon. But I hardly need to lecture you of all people on that point.

Shoshana Zuboff’s concept of the “Big Other,” stripped of its ominous Big Brother connotations, is actually not a bad way of thinking about how money functions in general. One might ask indeed, “If you think that money as we know it is backed by nothing, why do you think Facebook is so interested? After all, what is Facebook 'backed' by?” But to allow Big Tech into this arena is a specularly high-stakes gamble. Their infrastructural power is immense and we are only beginning to come to terms with it. So too, of course, is that of macrofinance. When you talk about bringing those two together you are really talking about two tectonic plates rubbing up against each other. Right now it is hardly as though we can be confident that we have the technical, legal, economic, or political capacity to regulate either of them, let alone the two of them in some kind of synthesis.

The convergence may be hard to stop. We may have to allow it. But let us not rule out other options. And let us not fall into deterministic talk. Remember Larry Summers dismissing Raghu Rajan as a luddite for expressing concern about financial instability. And then came 2008!

Adam Tooze holds the Shelby Cullom Davis chair of History at Columbia University and serves as Director of the European Institute. In 2019, Foreign Policy named him one of the top Global Thinkers of the decade.

Adam was born in London. He grew up between England and Heidelberg, Germany. Having received his BA in Economics from King’s College Cambridge in the summer of 1989, he had the good fortune to witness the end of the Cold War in Berlin, where he began his postgraduate studies. He went on to take his PhD from the London School of Economics. Since 1996 Adam has taught at the University of Cambridge, Yale and since 2015 at Columbia University in New York City.

Adam’s books have been translated into eleven languages. He writes widely for the global press. He is contributing writer for the New Statesman and a columnist for Foreign Policy.

Adam writes the Chartbook Newsletter at adamtooze.substack.com

Follow him @adam_tooze and on the Ones and Tooze podcast.