Sound Money Part 1: Money and Decentralized Cryptocurrencies

in #money6 years ago

This subject has and always will be incredibly important to me as I see it as the single most important driver in most problems that plague our society today. This post and future posts will be part of a “Sound Money” series. If you aren’t already bored out of your mind by the subject and walking for the door, then I applaud you! Stay tuned!

Anti-disestablishmentarianism. I learned this word in 7th grade and the only reason I remembered it is because I believed at the time it was the longest word in the english dictionary and perhaps it would just make me smarter to say it! Turns out – it was not the longest word and saying it had no effect on my intelligence. I was still as ignorant and unsure as before I said it. The word itself stuck with me anyways. Anti-disestablishmentarianism. Say it a few times yourself. Now examine how you feel. Don’t you feel intelligent and sophisticated saying such a big word?!? Joking aside – The meaning behind it strikes a particular note with me. It is the opposition to the withdrawal of state support or recognition from an established church, especially the Anglican Church in 19th-century England. Or in simple and broad terms it represents the idea of opposition to the separation of church and state. This subject was extremely contentious during its inception. Fast forward to today and I would argue that a majority of people now understand why this simple idea of separating church and state is so important to a free society. In this article, I argue for a very similar idea for very similar reasons. I argue for the separation of state and money because of the additional freedom and liberty it will bring to individuals and the power it would take away from central planning institutions.

So the questions has to be asked – What is money? Is it physical and tangible? Is it an idea? Is it philosophical? Is money the pieces of paper in your wallet with dead president’s faces on them, is it the plastic cards we swipe at stores or is it the silver dollars that your grandma keeps locked away in her dusty stale attic? It is any and all those things and can be whatever as long as people have confidence in it. We attempt to explore this concept and what brings about confidence in any form of money in this post. We use money, specifically the US dollar where I am from, as a way of financially interacting with each other every day and dozens of times within that day. An efficient form of money is paramount to the way we voluntarily and peacefully exchange value and assists worth value. In the United States we use the fiat money system, or in other words a system in which the US government creates legal tender by decree. We rarely ever discuss what makes money “money” and more specifically why the US dollar or other fiat money systems have value. Honestly, the need to discuss it is not immediately apparent because our legal tender and “money” system relative to other understood systems works very well. In a free and competitive marketplace, better ideas beat older outdated and inefficient ideas and the main thing here is that with money no other more efficient recent alternatives shown to work in the marketplace have been created and implemented. Further, voluntarily changing to something other than the fiat money system would take such a large scale effort, mass education over generations and require an almost insurmountable change in our current monetary system. I see this similar to the metrication debate – Many well informed individuals can agree that the imperial unit of measurement (inches, feet, yards, miles, etc) is less effective in comparison to the metric system (centimeters, meters, kilometers, etc) and the USA in particular would benefit in conforming to the rest of the world’s use of the metric system, but societies with entrenched use cases and long histories of imperial measurement system adoption would not dare to tackle switching because of the overall difficulty. Honestly, no one really cares whether someone uses a liter or a gallon to described volume because it doesn’t have a large effect on anyone. The USA has had a long history of trying to go metric, but has not yet been successful [4]. In monetary policy, history has proven that large scale changes occur regularly, but are very slow at bringing about better alternatives. The need for a better alternative is usually brought on by the failure of a current system and not the mass voluntary desire to switch. Recent history has shown that on average our current system has worked just fine and so there is no need to move to a better alternative. Failures of monetary systems occur regularly and include specific examples like Rome between 100-300 AD and recent cases in many nation states around the globe such as Germany after World War I, Argentina in the 1980s, Zimbabwe in the late 90s and 2000s and Venezuela today. Double and triple digit inflation of the money supply in these countries has brought about horrific economic conditions which has proven to destroy individual freedom and liberty. The question then becomes has a new system of money not emerged because there is not a better system? We have to analyze what money is to answer that question.

Money at it’s core can be anything. It can be United States Federal Reserve notes, commodities such as gold, silver, and copper or even prepaid mobile phone minutes as has recently been adopted in Kenya [1]. As long as there is a seller and a willing buyer anyone can exchange something of value for something else of value. The definition of value is defined by the buyer as well as seller and as long as they come to a voluntary agreement, all is well and the transaction can occur. Taking an example from say 1834 – On a peer-to-peer basis this could be exchanging a small pig for a sack of corn and 2 pounds of sugar. All these items could be considered money, but what they are not is an efficient form of money. To become widely adopted and efficient, money has to meet multiple criteria which include the following:

Fungible – Mutually interchangeable. For example, if we both own 1 Euro then switching the Euros with each other would make no difference to our held value post transaction. This would become a problem if say your 1 Euro had blemishes and it was seen as less valuable.
Value stability – Day to day value of an accepted form of money must not change and year to year must change very little. For example, when you say sign a lease and agree to pay your landlord $1500 monthly rent, the landlord must have confidence that $1500 a month from now will still buy a similar amount of goods and services. If it does not, each party is taking on risk.

Acceptability – It must be accepted by the masses.
Divisible – It must be able to broken down into smaller portions or larger denominations must be available for use.
Portable – You must be able to transport it with ease.
Durable – It must continue to last over time.
Limited supply – The # of circulating units must be limited or it’s supply growth must be slow enough and predictable to the market such that it successfully meets item # 2 above.

As long as something meets these criteria and meets them very well, then that item can work as money. Whether a form of money reaches these criteria is not generally a yes or no question, but rather is measured on a sliding scale. For example, the portability of a house vs. a cow vs. a sack of flour vs. a diamond increases from one item to the next and would be measured from one end of the sliding scale to the other. Historically, gold and silver have beat other money competitors at meeting these criteria and meeting them well enough to become globally accepted as money. This raises the question so why aren’t they used anymore as money? To gain an understanding of this, one can look at a recent timeline of gold and silver is America. Running through the short story of money in the USA – In the past several hundred years gold and silver have been unable to meet certain criteria very efficiently. As the velocity of money (the speed at which one unit of money is used to spend on goods or services over time) has increased, gold and silver have become terribly inefficient 1.) at being portable 2.) dividing into smaller and joining into larger pieces and 3.) less accepted for goods and services (arguably and partially related to items 1 & 2 above). As precious metals became less efficient at fulfilling all these qualities, new forms of money were introduced voluntarily through marketplace needs. Exchanging gold and silver for goods and services soon became exchanging a bank note that represented your gold and silver stored at that bank for goods and services. For example – I own 10 kilograms of gold in 1880 and I want to buy land. It is much less practical and secure for me to hold this gold at my current place of residence and haul it to the seller’s property where we make the transaction. It makes a lot more sense to hold this gold in a bank vault where it is more secure. I would then own corresponding bank notes that represent this gold and pay the owner of the property with these notes. This system functioned until 1934 when President Franklin Roosevelt signed an executive order that made it illegal for residents to “hoard” gold [2]. In effect, residents were told they would need to turn in their gold to the Federal Reserve for $20.67 USD per ounce. What followed next after World War II was the United Nations Bretton-Woods agreement which stated that the US dollar would be the world reserve currency and it would be pegged to gold at $35.00 per ounce [3]. All other national currencies would be pegged to the dollar. In essence, all national currencies could be exchanged for gold at predictable exchange rates. This created a form of money that still represented gold by being backed by gold, but was much more efficient at meeting the portability and divisible criteria of money. This system went on until the 1960s when it soon became apparent to foreign governments that the US did not have 1 ounce of gold to back up every 35 USD in global circulation. France saw this and thus began asking for gold at $35.00/oz and because not enough gold existed in US vaults to supply all requests at this set price – shortly afterwards in 1971 the US abandoned the gold standard. Gold began rising in price against the USD until the free market found a somewhat stable price after a peak of close to $700.00/oz. The misunderstanding here is that the price of gold rose. That is incorrect. The price of the dollar actually fell when the marketplace realized how many USD were actually in circulation. We then moved into a new monetary system where national currencies have no backing to them beyond government decree and they float relative to each other. This is called the fiat system and we are currently in this stage.

So why would we want to separate the state and money? The system appears to work very well doesn’t it? This fiat money system that we are currently using gives political institutions large amounts of control and power over the monetary system. This happens only because individuals as a mass assume government institutions know how to effectively, efficiently and benevolently manage the monetary system. The misunderstanding here is not that these institutions are inherently corrupt or nefarious, because they aren’t. It is that the monetary system requires managing! I see this drawing similarities in historical comparisons. For example, in previous nation states – speech, ideas, assembly and press were at times subject to censorship, retaliation and regulation. Would you feel free to verbally insult the Queen of England in 1600? Would you feel ok printing an article in 1940s Germany supporting Capitalistic ideas of America? Would you feel comfortable outwardly arguing against communist philosophy in 1950s Soviet Union? Would you feel safe gathering in Tiananmen Square in 1989 China? We can all say unequivocally “no” to each of those statements now AND if you lived in those times. We as a mass only realize now the importance of being able to freely and voluntarily speak, think, write and gather in such a way that political institutions cannot censor our interactions as long as we are not hurting anyone. In each of the above historical cases we would be afraid of a political authority who managed what can and cannot be said, written, and thought. Fast forward to today – Would you feel comfortable sending money in Iran to an American friend? Would you feel free in America to send a monetary donation to Wikileaks? Would you feel secure purchasing a Barack Obama autobiographical book if you lived in North Korea (let alone be able to make the purchase…). Again, the answer to these questions is “no.” Why is that? It is because similar to the political institutions formerly in some cases and currently in other cases having the ability to manage/restrict/manipulate speech, thought, press and assembly these same institutions have the ability to still manage/restrict/manipulate the flow of money. The flow of money just like the flow of speech, press, thoughts, etc. should be between free actors who voluntarily choose to financially interact. It is NO different than freely interacting verbally, in writing or as a group. If this is the case, why haven’t we moved to this system? I argue that it is because there literally has not been a working system created that can fulfill the need to freely transact between each other beyond our current system in which it efficiently meets all the criteria of what money is and at the same time resists institutionalized pressure, manipulation and censorship. The gold standard has been the closet we got to a large scale sound money experiment, but in the end we grew out of it due to its inherent inefficiencies, at least in it’s previous state. In the end, the marketplace will choose what money actually is, but this is where I argue for the education around cryptocurrencies. Cryptocurrencies are a symptom of a existing inefficient monetary system. Even though markets are far from free, they are still free enough to innovate and innovate they have with money. Cryptocurrency currently meet most criteria of money as listed above and in an incredibly efficient manner. They currently lack in the “acceptability” and “value stability” categories and in 2018 they lack these to a large degree, but this is just the beginning of a large scale experiment. Cryptocurrency is indeed an experiment that is just under 10 years old. Acceptability and stability will come together and only time will show whether they are effective or not, but if they can prove to meet all the criteria of money very efficiently over time – than I guarantee they will begin to be adopted especially as people begin to understand why current monetary systems do not meet all the above criteria efficiently. I see the idea behind cryptocurrency as a tool for society to take steps towards gaining more individual economic freedom and liberty which gets my marketplace and political vote every single time.

[1] https://www.economist.com/news/finance-and-economics/21569744-use-pre-paid-mobile-phone-minutes-currency-airtime-money

[2] https://en.wikipedia.org/wiki/Executive_Order_6102

[3] https://en.wikipedia.org/wiki/Bretton_Woods_system

[4] https://en.wikipedia.org/wiki/Metrication_in_the_United_States

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