Why crypto is ideal money

Tuesday 06 October 2015

There is an issue we readily overlook in money creation, and crypto neatly addresses it.

I’ve been reading Debt: The first 5,000 years, by David Graeber, and it’s an eye-opening book.

To start with, Graeber turns on its head the traditional idea of where money came from. Conventional economics text books will tell you that primitive societies operated barter economies. These were a real pain when it came to swapping your cow for axe heads, since you might only be able to find someone who wanted to swap cows for eggs, and cows aren’t readily divisible if you only want a handful of eggs to trade for a single axe head. Hence people cleverly created money to act as an intermediate stage in the transaction. Obviously.

Read also: Andy Haldane wants to get rid of physical cash

The problem is there’s absolutely no evidence of this kind of economy ever existing. Some of the earliest written texts record the financial affairs of Sumerian temple complexes: who was owed grain in return for labour, who owed the temple funds for renting land, and so on. Money came into existence as a unit of account to standardise these records, with a shekel of silver designated as the value of 60 measures of barley - or a month’s wages for labour. Once you had that, it made sense for merchants to use silver as a medium of exchange, but the normal way of going about life was to tally debt and settle up when it was convenient, like after the barley harvest. Barter only happened amongst strangers or where there was no trust, when there was a need to settle up immediately.

Temple

Money likely originated as a means of tallying debts for temple complexes - not to replace a barter economy

Seigniorage

The relevance to bitcoin and other cryptocurrencies is that early money was simply pieces of silver. The purity would be established with a touchstone, and then the metal would be weighed out according to the transaction in question.

At some point in history, some bright spark realised that it might be convenient to use fixed weights of known purity for transactions - hence the first coins were minted, some time around the 6th century BC. And from that point, things went downhill.

It might have been a little annoying to have to weigh out your silver every time you wanted to buy something, after having established its actual silver content, but this process was at least straightforward and trustworthy. Once coins came into the equation, claiming to have a certain value - stamped on their face for all to see - that changed. Not least because only certain authorities allowed themselves the privilege of minting coins. And governments, it turned out, weren’t above cutting themselves in on the deal. It might be a little bit in seigniorage (the difference between the cost of the metal and the face value of the coin), it might be heavy debasement and rampant inflation if, like Henry VIII, you try to pass off mostly copper coins as silver. But once money creation is centralised under a single authority, that authority is going to find a way to transfer value to itself.

Crypto: perfect money

And so we have a process in which silver - infinitely divisible, weighed out on demand - was replaced by tokens that fraudulently claimed to have a certain value. From there, it’s not much of a slide to fiat money, where there is no link to a commodity at all.

Then take bitcoin. It’s almost infinitely divisible (eight decimal places should be plenty for now) and - thanks to the cryptographic by which it is created - there is no doubt about its ‘purity’. It’s just not possible to introduce new material into the money supply, like Henry VIII diluting silver pennies with chunks of copper. And there’s no central authority to create them and tinker with their composition. Money creation is transparent, pure, and decentralised.

Think about it, for a moment. It’s something that hasn’t happened for 2,500 years.


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