Blockchains, banks, and happiness

In 1947 my grandmother got a job at Dry Dock Savings Bank on Lexington and 59th street. Her role there was to do the ledgers each month: that is, she entered the receipts from the tellers — delivered as stacks of cards printed by early NCR machines — into a large computer which they called “the organ” in order to balance the books.

Dry Dock Savings Bank, based in White Plains, NY, had 21 branches in and around New York City and Westchester County. It closed in 1992 after a succession of real estate loans went bad.

The bank managers picked her for this particular task because she didn’t mis-key entries, no mistakes, not ever. It seems obvious to say that precision should matter in the calculation of the bank’s ledger. They rewarded her by building a wooden platform so she could reach the computer’s buttons more easily.

Traditionally, economic systems have relied on such careful ledgers. In the UK, you’ll sometimes hear ledgers cheekily referred to as exchequers for the old name of the British treasury. The exchequer got its name from a table used for counting money. (The French word for chessboard is echiquier.) Wikipedia says:

… the table was large, 10 feet by 5 feet with a raised edge or “lip” on all sides of about the height of four fingers to ensure that nothing fell off it, upon which counters were placed representing various values… it was covered by a black cloth bearing green stripes of about the breadth of a human hand, in a chequer-pattern. The spaces represented pounds, shillings and pence.

From about 1100 AD all the way up to 1826, the English monarchs used tally sticks (pictured) as money, so the exchequer buildings would have held in storage stacks of wood slats representing data about how much currency was in circulation.

Also from Wikipedia:

The cuts were made the full width of the stick so that, after splitting, the portion kept by the issuer (the foil) exactly matched the piece (the stock) given as a receipt. Each stick had to have the details of the transaction written on it, in ink, to make it a valid record.
Matching tally sticks.

Tally sticks were used as money in the UK for over 700 years. The British finally stopped accepting these sticks as legal tender in 1826. Interesting historical footnote: while disposing of the old tally sticks in a Parliament building oven, exchequer officials caught the building on fire. (So, yes, central bankers have always been this way.)

These are all simple systems for “keeping the ledger balanced.” Today, the largest banks have trillions of dollars of instruments on their balance sheets, but nobody can tell you what’s in all of them, what they’re worth, or even where they are. Deutsche Bank was recently called out by the IMF for being so larded up with bad debt that all by itself it represents a threat to global economic stability. Its stock price has dropped 90 percent since 2007 because everyone knows the bank is broke. Italy’s oldest bank is also broke. Wells Fargo had to fire several thousand employees in September 2016 for creating false accounts in customers’ names to meet sales quotas and get bonuses. From 2008–2012, the rate of bank closures in the US went up 46x as compared to the five years prior.

Discussed in this post:

The point is: over the last 10 years, banks have begun to fail at their most fundamental task, one which people in the Middle Ages were doing with sticks and a tablecloth. One which my grandmother could do in her early 20s with a large, primitive adding machine. That is, keep the count.

Where is all this banking trouble taking us?

One answer is the topic of a book by a Belgian physics professor named Peter Peeters, who as he describes it, “achieved financial independence and immediately resigned from the University of Brussels” in order to devote himself to “the work I really wanted to do: the study of society and the future of the world.” Sounds like a neat guy.

His book, The Four Phases of Society, is not a new book, so all the better to assess whether the predictions for the early 2000s came true. (They mostly did.)

The thesis of this book is: a nation’s per capita GNP correlates to its citizenry’s behavior. And that in the West, we are reaching a new level of wealth that will catapult us into the next phase of civilization, whether that be a good one or a bad one.

But if there’s one catch in this theory, it’s that the infrastructure of society has ceased to produce reliable data with which we could calculate our pcGNP. This doesn’t mean Peeters’ theory is wrong at all, but rather makes light of the absurd fact that we will not know the true productivity of the economy in the present phase of history until much later. We are flying blind.

That is because the current valuations of all of our property, assets, currencies, and commodities are denominated in unsound, hyper-inflated, easy money. Or they’re backed by worthless underlying assets.

The four phases of society

For any developing economy, Peeters says, the progression goes like this:

Religious society →

Nationalistic / Militaristic society →

Materialistic society → ???

Peeters’ conclusion is that, around 2050, a new type of society will come about, which he calls the Fourth Phase — but not before we get fully reject and abolish the “Third Phase” and all of its vapid misery. It’s hard to imagine that he wrote this book in 1999, long before Facebook, Instagram, Snapchat, and 3D virtual porn:

“Being unable to take control of their life and give it a deeper meaning, many people [in the Materialistic phase] have largely lost interest in anything but the immediate gratification of their personal desires… make money, get rich, and consume. Nothing else counts.”

He is not a conservative, and does not propose a “return” to any kind of old values. (Actually, he characterizes conservative movements as the last flare-up of dying social systems, which is interesting because if true, would mean that Islamic terrorism will extinguish on its own.) But he describes our current culture essentially as a cult that fetishizes working and buying.

“Society has always imposed its rigid ways of behavior and thinking upon the free personality,” he writes. “Institutionalized religion did so bluntly, nationalism coerced, while materialism brainwashes in a less overtly imposing way.” (If you think that’s bleak, don’t look up his other book, Can We Avoid A Third World War Around 2017?)

So what does this have to do with banks? Well, they are the central conduit for much of what Peeters would call “artificial” wealth that characterizes the Materialistic phase: that is, wealth generated by the mere transfer of assets, by increasing the velocity of money instead of increasing actual productivity. Today, the hip aspiration is to be, in all ways, a mini-Rockefeller.

Speculation, market-making, leveraged trading, arbitrage, and the securitization of debt into derivative instruments all act to obscure the real meaning of the things we own. Borrowing has become absurdly cheap. Securities ratings have little meaning. Government bonds are pay negative interest rates. Complex derivatives hide loads of bad loans. Our financial system is manufacturing the Grade D sausage.

What JPMorgan and Oliver Wyman think will happen

Unlike my grandma, today’s bankers have fundamentally lost count of everything. But, this will not persist for long, because it cannot persist without a major global price correction and the collapse of the dollar. Let’s avoid that, says the head of JPMorgan’s investment bank, among other authors:

There is a growing realization that distributed ledger technology — popularly known as blockchain — will bring a radical shift in the way we think about financial assets. A consensus is forming that [blockchain] is the real deal. Disregarding it is a risk.

This paper does an excellent job explaining what blockchain really means, so I’ll recapitulate. As they rightly point out, there are three underlying technologies that come together to make digital assets possible. Those three technologies are:

  • Peer to peer networking: a group of computers that can communicate among themselves without relying on a single central authority of having a single point of failure. [Think BitTorrent.]
  • Asymmetric cryptography: a way to send a message encrypted for specific recipients such that anyone can verify the sender’s authenticity but only intended recipients can read the message contents. [Many messaging apps today, such as WhatsApp and iMessage, are encrypted.]
  • Cryptographic hashing: a way to generate a small, unique “fingerprint” for any data allowing quick comparison of large data sets and secure way to verify that data has not been altered.

It’s point #3 that would make sense to my grandma. Tabulating the ledgers every month was how the bank figured out if someone was writing bad checks or embezzling. With cryptographic hashing, you can compare entire huge datasets using just one string of letters and numbers, almost instantly. In Ethereum, you’ll find the latter two technologies visible in every block header, in the form of a block hash and Merkle Root.

But, here’s where things get good — because, you see, being able to instantly compare ledgers means you can calculate the value of things on the fly. Today firms only mark to market in periodic intervals, so valuations of assets don’t change in anything like real time. “Real time calculation of underlying asset risk could enable more accurate pricing of asset-backed securities,” says the paper. “Beyond better data management, the ability of verify assets held on-ledger as truly unique is an innovation not offered by traditional databases.”

In short, these three technologies make it nearly impossible to fudge the value of an asset by making it too complex to accurately price. That means it’s much harder to pass off Grade D sausage as Grade A. Or to build a house-of-cards economy like the one we have today.

What the blockchain does to the Materialistic Phase

Blockchains keep institutions and governments honest. Even when it comes to real-world goods. As this recent paper by the UK government says:

Distributed ledgers can provide new ways of assuring ownership and provenance for goods and intellectual property. For example, Everledger provides a distributed ledger that assures the identity of diamonds, from being mined and cut to being sold and insured. In a market with a relatively high level of paper forgery, it makes attribution more efficient, and has the potential to reduce fraud and prevent ‘blood diamonds’ from entering the market.

This is the beginning of the end of three centuries of financial and mercantile fuckery. The counterfeiting, payoffs, trusts, secret wars, pallets of secret cash being airlifted to Iran — it will all be much, much harder to get away with. That is, as long as regular people are aware of how things currently work. (“Once people learn how the sausage is made, corruption doesn’t last very long,” Peter Thiel told me in an interview in 2014.)

“Our view is that blockchains impact may eventually reshape market structure,” says the Morgan paper, “product capabilities, and the client experience, ultimately having a lasting influence on the global economic system.”

For better or worse, the wind-down period may be long. “Another half century will be needed before people become totally disillusioned with the materialism of society,” Peeters writes, pegging the end of the Materialistic phase around 2042. “But they will eventually end by rejecting the impositions of modern working life and will then create a new type of society that encourages values totally different from those considered important today.”

Putting the timelines side-by-side, JPMorgan believes the conversion to blockchain-based financial systems will complete by about 2030, when we will begin to see management of corporate actions and governance via distributed ledger. By then, the fuckery will be put to rest for good, and our infrastructure may be fully decentralized.

At that point, “there will be no more wars, oppression, inequality, male domination, famine, fear, or enslavement of the mine,” Peeters says. “It will be the end of history as we conceive it.”

Originally published at on August 5, 2016.

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