Here is a short script I wrote around the history of money that is aimed at preparing crypto newbies to put cryptocurrency into its proper context within the history of money. If you want to use it to make a video or some other derivative work, just credit me as an author under the CC-BY license. You must still credit me even if you modify the text.
You work for it, you spend it for things you want and you save it for a rainy day but where does money come from? How did it evolve? What, really, is money? Is it gold coins, paper bills, ones and zeros? Or something else? How does Bitcoin fit into the history of money?
What is Money
Money is an intermediate asset that we use to facilitate the exchange of things that are not equal in value.
For example, if you have a pair of new leather shoes but want a banana, you can’t do a straight up exchange, since the shoes are worth more than the banana.
Enter money. Trade the shoes for an appropriate amount of money and then trade some of your newly-earned money for the banana. Everyone is happy and you have kept all your value. That is the utility of money.
Money is a medium of exchange. For something to be money, be it cigarettes, cowrie shells, paper notes, gold bars or Bitcoin coins, it should be durable, portable, divisible into smaller units, uniform, that is all the units should be identical, the supply should be predictable and it should be widely accepted.
Money is promises we make to each other, an expression of accountability and responsibility. Which is also to say a way of quantifying and transferring debt. Money is a way of representing that I owe you something, be it payment for services rendered, a home mortgage, my share of dinner last weekend or for whenever people engage in commerce. In this way, money is actually debt, because your promise to pay a specified amount of money in the future actually represents an asset for others.
Money is a narrative. The US Dollar tells a story of economic and military power. Your national fiat currency might tell you a story of patriotism or independence. Bitcoin tells a story of universal liberty and prosperity, without borders or middlemen who try to take a cut of your transactions.
Money has value because other people accept it in return for goods and services, and they accept it because they believe the narrative behind that currency. They believe they will be able to spend it themselves in the future and call upon the goods and services of others.
To sum up, money is a medium of exchange that we use to keep track of our promises to pay each other.
“Money is a promise that your sacrifice will pay off in the future.” — Jordan Peterson
Some say money came about due to the limitations of barter. Others as a way to quantify social credit that arises from natural community giving and receiving when for example your neighbor lends you some eggs, and at some later date they then borrow some milk from you.
Coincidence of wants happens when you want precisely the eggs and your neighbor wants precisely the milk. Barter can only successfully happen when there is coincidence of wants all across an economy, which is unlikely to happen.
Take, for example, Farmer A who produces eggs and Farmer B who produces milk from cows. Farmer A wants milk, but maybe Farmer B doesn’t want eggs right now. There is no coincidence of wants. Trade has broken down. The milk is spoiling and the eggs are going rotten.
But if someone invents money, then Farmer A can trade his eggs to Farmer B for some sea shells or gold coins. Now Farmer B is happy and Farmer A can still go to market and buy his milk with his new money.
Everyone is happy.
People have used cattle, alcohol, cigarettes, tools, yap stones, cowrie shells, metal coins and other suitable commodities as money in the past.
Metal coins, mostly gold, silver and other precious metals, may have been first used in order to pay soldiers for their service in armies. The armies, in turn, conquered lands and forced their new subjects into slavery, some of whom worked in mines to produce new coins to pay more armies.
This early use of coinage by nascent nation-states unfortunately led to less prosperity and more human suffering, rather than facilitating human flourishing as money should.
To sum up, early money was made from durable and scarce commodities that were not too difficult to transport. But these early forms of money suffered from some drawbacks.
Gold and Silver
Gold is a precious metal that is indestructible, fungible — that means that one gram of gold is no different from another — hard to counterfeit and mostly — tho unpredictably — limited in supply. Silver has similar properties but is less scarce than gold. Both metals also have other uses, such as in industry and jewelry.
The problem with gold is that coins can be debased and new gold supplies can be found, which reduces the relative purchasing power of all gold in existence.
Debasement happens when the issuer of gold coins mixes less valuable metals in with the gold when minting the coins. Over time, this means that the coins become less valuable, which means prices in the economy rise. The same number of coins buys fewer products than before. This is called inflation, and sometimes leads to hyper-inflation.
For example, the Roman Denarius was originally a 100% silver coin worth a day’s wages for a skilled laborer. Over time, Roman emperors ran low on silver while their appetite for coliseums, statues and other public works only grew. So, they reduced the amount of silver in each denarius until it was less than 0.5% silver. This enabled them to mint more coins with the same overall amount of silver. The debased Denarius was an inner brass core and a light coating of silver that easily wore off to reveal its true nature.
By 265 AD, these systematic debasements had caused the transferral of real wealth from the market economy to soldiers, barbarian mercenaries and other elements that were critical to maintaining the security and military supremacy of the Roman state. These elements knew their worth and would only accept pure coins, while the Roman public was left to trade in debased coins.
Hyper-inflation inevitably followed and people’s savings became worthless. Economic activity became unpredictable. Commerce slowed. Everyone suffered. Eventually, Rome fell.
This is similar to what is happening today in Venezuela.
Gold and Inflation
Gold has also been subject to surprise increases in supply. For example, in the 16th century, Spain moved enormous quantities of gold and silver from the New World to Europe. In 19th century North America, the California Gold Rush resulted in large new inflows of gold into the region.
But new money is not always new wealth. Bringing new units of money into the money supply actually reduces the net value of each unit. More money means each unit buys less than it did before. An increased money supply means higher prices.
Money, at the end of the day, is not wealth in itself. It is simply the neutral currency that permits us to efficiently exchange products and services with each other.
Inflation was one downside of these new gold discoveries, both in 16th century Europe and 19th century North America. Inflation eviscerates savings, reduces the value of capital, slows economic growth for decades to come and reduces labor productivity, slowing wage growth.
An economy can always grow, but only by producing new wealth through trade. Just adding new units of money only subdivides the existing economic pie into more pieces. But the overall size of the pie is only increased when new wealth is created.
Money is not wealth. That’s a tough lesson learned over and over again through history, from the Romans to the Spanish to the American miners, and even some Bitcoiners today need to learn it.
The Rise of Banking
As shells, cows, metal coins, stones and other commodity money are not easy to transport, banks were formed to securely store assets such as gold and silver. They issued paper notes that represented a promise to pay a certain amount of commodity money upon demand. Paper money emerged first in China in the 13th century and later in Sweden in the 17th century.
But the scarcity of commodity money became an issue as well. Sometimes there was more demand for exchange than there was supply of gold and silver to facilitate those exchanges. Scarce money is good for preserving value but if it’s hard to divide a gold coin or a shell into smaller pieces, then economic trade is forced to slow down. Scarce commodities can not easily expand in supply as the economy grows.
Bankers realized that paper money was much more convenient than coins and few people traded in their pieces of paper for gold and silver. Some issued more notes than they had gold stores with which to redeem them. This led to problems when people lost faith in the paper notes.
For example, in 1664, the first bank run happened in Sweden when Stockholm Banco lent out too much of its stores and could not redeem all of its paper notes. The US Great Depression in the 20th century saw many bank runs and failures as well.
When more paper notes are issued than there are reserves of hard money, it is only a matter of time before there is a run. Some people end up unable to redeem their notes, which become worthless. Life savings are lost. Economic investment and growth is delayed and damaged.
Fractional Reserve Banking
Today, when you take out a loan from a bank, they are not lending you someone else’s gold or cows or even their fiat currency. Instead, the bank creates new money that did not exist before. The bank simply types new digits into a computer and creates new money that is backed by nothing at all, not gold or silver or anything else.
In the United States, banks can create new money this way in the amount of 9 dollars for every 1 dollar they already have. They are only legally obligated to hold a reserve that is a fraction of the amount of money they are creating, hence fractional reserve banking.
It is your promise to pay the loan that becomes a valuable asset for the bank, and they buy it with the newly-created money they loan you. Banks are granted the privilege to do this by applying and being granted a government license, or charter.
Due to government-backed deposit insurance in some, but not all countries, bank deposits today are usually safe from bank runs up to a certain amount.
But, as with the new inflows of gold in the 16th and 19th centuries, fractional reserve banking increases the money supply and causes inflation. The US Dollar, for example, has lost 96% of its purchasing power since 1913 due to fractional reserve banking and central banking.
Fractional reserve banking represents a moral hazard since bankers can distribute the new money to their friends first. New money is initially valued the same as current money, and these connected people get full value out of their newly minted dollars.
But those of us who are not friendly with banks see our savings and wages proportionally decline in purchasing power with each newly-minted dollar.
As seen in the 2008 financial crisis in the United States, banks and other financial institutions that make bad or even fraudulent decisions are not usually held accountable. These institutions are, in fact, bailed out again and again with even more newly-created money. They are permitted to continue debasing our currency without barely any corrective action at all.
Fractional reserve banking is essentially a Ponzi scheme that permits banks to emit much more new money out of thin air than they have on hand from depositors. And we who have savings and earn wages are the losers in a rigged system we are hardly able to influence.
Central banking arose in 17th century England as a way for a cash-strapped government to continue spending money even when its coffers were empty — not unlike the Roman emperors who debased their coinage in order to build more statues of themselves.
The role of central banks is to create new money out of thin air and then give it to the federal government so the federal government can spend it into the economy.
Central banks are sometimes, but not always, public agencies of a federal government. The United States Federal Reserve Bank, for example, is a cartel of private banks. This cartel of banks holds a monopoly on the issuance of the US Dollar and the setting of interest rates.
Central banks preserve the moral hazard and inflationary tendencies of fractional reserve banking but expand them by orders of magnitude on a national and international scale, without practical limits or safeguards.
Those closest to the government — politicians, insiders, bureaucrats and defense contractors — get the newly-created money first when it is has the greatest purchasing power. They spend it into the economy at full value, increasing the money supply. The rest of us only later experience the silent and mysterious loss in purchasing power of our salaries and savings that is called inflation.
Simultaneously, governments use taxation and the complicated tax code of loopholes, brackets and penalties to take money back out of the economy from those least able to defend themselves. Large corporations can afford to lobby the government for tax breaks, but regular people can not. Large corporations can afford to hire firms of the best accountants and lawyers to scheme ways to pay the least amount of taxes while remaining nominally with the law.
We trade our energy, the hours of our days, for points in a gamed system that permits a select few at the top to manipulate us for their own benefit. They use the levers of money creation and taxation to force the rest of us into debt. They weaponize debt, and they use it to steal the fruits of our lives from us and our children.
In other words, central banking and taxation create a form of slavery. Under central banking, you don’t control your own life because a few people at the top control the rules by which you live your economic life.
Modern Monetary Theory
Modern monetary theory, or MMT, is a description of how central banking works in the 21st century and is the utopian idea that a small cadre of economists at the top can make better decisions about your economic needs than you can.
According to MMT, fiat currency — that is money which is backed by nothing, not gold or anything else — is given value through taxation. Governments demand taxes from you, and you may only pay those taxes in fiat currency.
For example, a central bank could come into a village and immediately levy a 100 dollar tax on every home. This tax is only payable in the currency issued by the same central bank. This would cause everyone in the town to do whatever possible to provide labor to the central bank or its agents in order to earn $100. All so the bank does not seize their homes, which are simply the rightful property of the people in the first place.
This means that modern fiat money is backed by a credible threat of violence. It only seems to work because there is an army and police force that will cage us and take our assets if we don’t pay taxes. This sounds a lot like those armies of old that subjugated whole populations and put them to work mining more gold coins to pay more armies.
MMT leads to ballooning national debts and inevitably hyper-inflation, a la Venezuela and Zimbabwe. MMT results in resource misallocations. Central planners don’t have skin in the game or a profit motive to help them make good spending decisions. This leads to the ”aristocracy of pull” that Ayn Rand described, i.e., individuals who gain power and wealth by knowing the right people, and not by producing real value for others.
For example, most money created through the central banking mechanism in the United States is spent by the government on weapons of war: drone strikes, soldiers, fighter jets, aircraft carriers, spies, torture rooms, foreign bases and more.
Without the ability to create money from nothing, the United States and other countries would be unable to dedicate so many of our resources to war and other wasteful programs. As consumers, we would simply choose not to allocate so much of our spending to those things.
Modern monetary theory is fascism by the back door, the silent seizing of real assets through the manipulation of money and taxation. According to MMT, money is not a commodity but a function of law — in other words, we are ordered to work for it, whether we like it or not.
This is the twenty-first century and thanks to the invention of Bitcoin in 2008, we are no longer forced to use fiat currency created from nothing that eats away at our savings and wages with inflation.
We can now choose to use Bitcoin — or Bitcoin Cash, depending on your viewpoint, the faithful continuation of the Bitcoin vision as world-scale peer-to-peer electronic cash.
Unlike central banking and fiat currency, Bitcoin has a predictable emission schedule. There are no central planners who make arbitrary decisions on when to emit new coins or how many. The emission algorithm is set in stone via code and community consensus.
Bitcoin avoids the need for a central bank and central planners by using game theory to balance mining interests, thus creating a truly decentralized monetary system. Bitcoin has no middlemen, no elite bankers and certainly no taxes. Emission is transparent on-chain.
Bitcoin has a fixed total supply of about 21 million coins, which makes it similar to gold. This means Bitcoin is a deflationary currency. As more people use it, buy it and hold, its purchasing power is expected to increase — unlike fiat currency.
The price of Bitcoin relative to other currencies does, however, vary in price and can be quite volatile.
You can buy Bitcoin today at exchanges across the globe. Save it, spend at merchants, buy mobile minutes, send remittances, buy goods and services across borders and more. Enjoy trustless privacy via services such as Cash Fusion on Bitcoin Cash. Custody your own funds with a mobile or desktop wallet.
Create your own currency as tokens on a blockchain. In the future, there will be many forms of money and they will compete freely. Anyone can create a new currency now! Make one for your community and give it value through use and utility.
Money is a mechanism of trade — a medium of exchange. When a few hold a monopoly on the issuance of money and when they can manipulate the system to suit themselves, then they effectively tilt the playing field against you.
Stop selling your future to fiat currency. Begin your Bitcoin, or Bitcoin Cash, journey today and start working for yourself in the new global economy.
Here are a couple resources if you want to learn more.
Header photo by Bermix Studio on Unsplash