Searching for the First True Money
The history of money is long. Having grown up in the United States, I have always understood our greenbacks as the most perfect money ever made. But my perspective is also influenced by younger years in Brazil as well. In 1942, Brazil overhauled its currency. They moved from the old Colonial Real to the Cruzeiro. In 1967 inflation had caused the Cruzeiro to be devalued. It was replaced by the Cruzeiro Novo. As the coin gained traction, and the old coins were taken out of circulation, the name was changed to reflect the old coin. The Cruzeiro Novo was renamed the Cruzeiro in 1970. The Cruzeiro quickly inflated, like its predecessor. In 1983, Brazil devalued the Cruzeiro by 30%. By February of 1986, the Cruzeiro was abandoned because of inflation. In its place was introduced the Cruzado. And by the end of 1986, it was clear that the Cruzado would see a similar demise. The Cruzado was devalued in 1989 and replaced by the Cruzado Novo which was replaced one year and three months later by the Cruzeiro Real at par value. 11 months later, June of 1994, the Cruzeiro Real was scrapped for a new economic plan under the administration of President Fernando Henrique Cardoso. Again, subject to massive deflation over those 11 months, it was replaced by the final and current iteration of the Brazilian currency the Real.
The Real is still in print. The dollar is still in print. But this represents only a small slice of the history of money. The 1900s were replete with countries being caught flatfooted by inflation. Inflation is a monster under the bed. It sits stealthily, unseen by adults, ignored and cast off as a problem for those dumb children in third world countries. But it lurks. It sits there, ever present, kept at bay, in some ways by the accident of productivity. And it is an accident.
Productivity isn't promised. There is no law that says the people of your country must produce goods or perform services at an ever increasing rate of growth. This is the reality of the world, but not a law of the world (just look at the French with their leisure or the Spanish with their naps). In some ways, perhaps, ever-increasing productivity is distinctly American. The need, the drive, the desire to be productive is an unceasing engine that drives the superpower. And its driver, competition, is to the economy as a Holstein's teat is to her calf.
And what of the dollar? Money serves to allow frictionless transactions between actors in that economy. To describe this, economists have broken money down into three necessary functions. Money's functions are that it serve as a unit of account, a medium of exchange, and a store of value. Modernity makes obvious these three functions. As a unit of account, it serves as the thing everything is priced in. As a medium of exchange, it is used to net. As a store of value, it is stable enough that one can expect its value to remain approximately the same from one moment to the next. This means that one can impute a net present value of money with relative ease. If I can buy one tomato today for $1.00, then tomorrow, I am likely to be able to purchase the same tomato for $1.00. Over long periods of time, the value of the money might change, but in the case of a good unit of account, this change is de minimis. Perhaps, a year from now the tomato will cost me $1.04 rather than the $1.00 it costs me today. Or, the opposite might occur. Perhaps, in a year, the tomato will cost me $.96. Whatever the case, the change is small. This is important, because knowing that the money might change slightly over long periods of time, particularly when the country has a policy of causing this to happen as the US does, one can make decisions that allow them to avoid the devaluation caused by inflation.
The American Dollar, once backed by gold, was divorced from the fetters of the hard asset in order that it might better reflect growth. Gold, once seen as the paragon of money, has its issues. To serve the functions of store of value, unit of account, and medium of exchange, modern theory suggests that money must be durable, portable, divisible, uniform, in limited supply, and highly accepted. Gold fails on nearly every count. While it is certainly durable, its weight makes it hard to move. As money, whatever hard asset is used will have to expand to the size of its container. This means that gold is actually hurt by its limited supply. The total amount of gold in the world, it is said, would fill up an olympic sized pool. This limits its use because of its value density. Even the smallest fleck is worth a princely sum. This makes it difficult to divide. Consider, if you will the $1.00 tomato. Today, $1 of gold would be equivalent to about 0.017 grams. That's really small. Buying a tomato would involve a gram scale, a file, and a grocer who never sneezes lest he blow away the accumulated dust. It is elemental, so, I suppose it is uniform, though its mass is about the same as tungsten's. This makes it hard to distinguish real gold from the much cheaper metal without an Archimedean sensibility. These problems were overcome by representative notes. These notes can represent a small unit of gold, additionally, and their issuance by a government entity allows them to overcome any barriers to acceptance. What is good about gold is that it is anchored in the world as we know it. Gold grows at a rate governed by the efforts of independent miners extracting it from the earth.
As a medium of exchange, gold worked quite well when the world was a smaller place. The UK, for example, used it for more than a century. In 1933, the UK got off the gold standard. And the US, famously, abandoned all semblance of the gold standard in 1971. Since that day, America's dollar has been a sort of naked representation of value. Notably, it has been the strongest, most consistent representation of value ever created. Don't believe the Libertarian rhetoric touting 10+% hidden inflation each year. That's bullshit. In fact, life has been a practice in consistent deflationary pressures since 1971. In America, the poor have televisions, cable, cell phones, medicine, homes and condos, and all the trappings of luxury at a fraction of the cost that they were available at in 1971 compared to the value of their relative incomes. There are several reasons for this, but it's beyond the scope of this analysis. Needless to say, escaping the trappings of a hard asset like gold, have proven effective. And while fiat money may end up a footnote in history, it is not necessarily so, nor is it the great Satan that it is represented by among Libertarians. In fact, it is better than gold in every way. And, moreover, it was inevitable. Consider, fiat money is durable, portable, divisible, uniform, in limited supply, and highly accepted. Much of these features are artificial. For example, its limited supply is an artifact of a limited number of decision makers. But the other side of this coin (pun intended) is that the government's approval of it and regulation of it forces its mass adoption. The fulfillment of these features makes fiat money an excellent store of value, a wonderful unit of account, and a highly accepted and reliable medium of exchange. Fiat money fits the functions of money in every way.
Critiques are often rooted in the flawed assumption that governments are necessarily corrupt at all times. Or, that specie (the thing itself) is necessary to value minted money. Alas, the ideologues that foist upon money these criteria have never explained the fundamental flaw in their criticism: why, to this day, can I exchange fiat for goods and services? Many (if not most) fiat currencies, for better or worse, have maintained their value predictably and stably. And, in time, it becomes harder and harder to accept these critiques as valid without believing unproven assumptions about hidden inflation. Moreover, the idea that paper money must be "backed," as it is merely representative value, must be countered with an explanation of why fiat money cannot, itself, be the thing itself. After all, money is merely a ledger system by which we can measure value. The necessity of it being rooted in the real world is an artifact of an era where the function of money was less understood, and its necessity arose as a result of commerce rather than intellectual artifice. As an intellectual exercise, the necessity of money is understood because it arose naturally, and its features were distilled and agreed on. These features are well served artificially as readily as they are served by nature.
The more legitimate critique of fiat's problems, however, come in their manufactured shortcomings. Scarcity, for example, is only a valid assumption as long as it is closely enforced in a fiat system. Like ever-increasing production, it is only true today, and not necessarily true tomorrow. Scarcity, as a value, is a mere assumption, not a law. And there are many things that could break this assumption, even today. For example, as things stand, the United States is the world's reserve currency. Were it to become undesirable, the United States would see the repatriation of its notes at a staggering pace. This pace could bring with it unexpected inflation. Moreover, modern monetary theory, at its root, says money printing ad nauseam is acceptable and mitigated by the counterweight of inflation. Yet, the political pressures to appease constituencies, may be a force so strong it overcomes any affect of the inflationary counterweight. That said, natural scarcity is similarly fragile. Diamonds, serve as a primary example of the possibility of the same sort of artifice in the natural world. Likewise, while gold is regulated by natural pressures, there is no single reason that prevents nature from endowing some lucky prospector the gift of divination wherein he falls into an unknown hole from which he extracts enough gold to double the world's supply. Moreover, it is only by choice that we have agreed that gold is only valuable once extracted. What prevents a government from simply declaring that gold in the ground is as valuable as gold out of the ground and issuing notes against the unrefined assets in its soil? How can one argue that gold in the ground is any less legitimate as a store of value than gold in a safe? Perhaps we treat gold in the ground like Fort Knox. We put guards around it, and simply prevent any extraction. After all, it's obviously safer there. Moreover, it's not as though we moved the gold that was represented by the promissory notes we passed around. We did not write on the gold who owned which bit of it. Rather our claim on it was merely the certificate we did or did not have. The certificate itself was the ledger, and gold was a useless appendage that promised to limit the size of that ledger. And to what end? There is no real use in limiting the size of the ledger.
Moreover, the acceptance of fiat is manufactured. There is no necessity that this remain a feature of any fiat money. This is regularly enforced by governments that declare fiat be accepted by those engaging in commerce. Moreover, governments often require its citizens to pay taxes in fiat. This enforces the acceptance of the fiat. But fiat can fall out of favor, as it does in countries where the currency inflates. In Brazil, during its period of currency crisis, and, indeed, around the world, US Dollars are regarded as the safest asset one can hold. In fact, the US Dollar is considered so safe that many countries take possession of dollars into their central banks, and create currencies tied to those holdings. Panama, Belize, Hong Kong, and many other countries peg their currencies to the US Dollar. Like in the gold standard, much of the world relies on a dollar standard. This is because fiat currency, like gold, is the thing itself. This is the answer to the question I posed earlier. The fact that the dollar is the thing itself is the reason that you can buy goods and services with it, even as it is not, itself, backed by anything. Its creation is the result of a masturbatory process of creating debts in the thing itself. And the thing itself represents a cascade of IOUs.
Uniformity is also a manufactured feature of money. Uniformity, contains within it what is known as fungibility. Fungibility is the ability to accept any $1 bill for another. Consider, when receiving change, you do not generally care whether the bills you receive are nice and crisp or beat to hell. Rather, you will take any $1 bill in exchange for any other bill. That is normally the case. Though uniformity and its fungibility are manufactured in a paper fiat system. This fungibility can be broken in a number of ways. Tracking serial numbers, for example, can destroy fungibility, dumping radioactive, invisible dyes on bills can also destroy fungibility. Bank dye packs destroy fungibility. For the most part, dollars are fungible, but this is not necessarily the case. And it is not required of dollars. It is a built-in feature, but it doesn't have to be that way.
A fiat currency is a more competent solution to the function of money than is gold. Alas, the critiques here are important. The elements of fiat that are manufactured and are not endemic to its nature, are systemic risks to its benefits as money. It is to say that the scarcity of fiat and its acceptance are enforced through law and culture. However, they are not, by the natural order, necessary. This makes fiat tenuous as money. It is money insofar as it is enforced as money by the government or its people. The Argentinian Peso is a good example of this risk. Argentina has used the Peso in one form or another for a very long time. Like Brazil, it suffered untold inflation throughout the 20th century. The Peso is anathema to her citizens; they prefer holding dollars. The Peso is still used to transact, but the rapid inflation in the country has broken the confidence of the people who need to use it. They hold as little as possible. The government, for its part, does what it can to enforce an artificial value. For example, many assume that the price of the McDonald's Big Mac is being manipulated by the government. This is because the Economist runs a (jokingly serious) inflation calculation every year by publishing the prices of Big Macs in countries around the world. The Argentinian Big Mac is one of the cheapest items on their McDonald's menu. The goal of price controlling such a trivial item is to hide the inflation that would be revealed in a price hike. Meanwhile, the people of the nation trade at what's known as the Blue Dollar rate. This rate represents the unmanipulated, free-floating street price of Pesos. Needless to say it reflects a largely inflationary peso and a desire for US Dollars.
Despite their desire for US Dollars, what is important is the fact that the US Dollar and the Peso represent the exact same thing. The difference in their value might be competence, it might be scale, it might be God's divine love for the United States. Whatever the case, the value of the Peso to the people of Argentina is no less guaranteed than the value of the dollar to the citizens of the United States. Rather, both sit tenuously on the shoulders of a global system of governance, the decisions of a few appointed people in the system, and the willingness of the people of the countries to continually and willingly transact in the currency. And while it may be de rigueur among the dissident majority to speak ill of those in charge of the system, it is a unhelpful bias. Rather, the system's longevity and constancy, seems to make the more apt assumption that the people at the helm are competent and well intentioned. But, again, their competency isn't the actual problem. This is because on a long enough time scale, a system whose elements are composed of artificial means will come undone. Scarcity is not a law of fiat and acceptance is not a guarantee. These are mere artifacts. They are thin strings tied around the hands of divinely appointed puppet masters. The masters themselves of varying competencies, philosophies, political persuasions, and eccentricities. The most quirky of our modern puppeteers being Greenspan who, famously, may have had an Oedipal affair with his philosophical mother, Ayn Rand.
Greenspan is a divine pupeteer, made such, by the divine breath of God and Ronald Reagan. This man deemed the most competent for the job of maintaining the fiat ledger and its legitimacy. And I'm not criticizing Greenspan's competence. The point here is not that he was or was not competent. It is merely to demonstrate the humanity of those in charge of the fiat endeavor. And Greenspan, like his predecessors and precursors, was most certainly a flawed, arrogant, and unpredictable master of the fiat experiment. And, whether he performed that job well or not is irrelevant. What is relevant is that at some point, perhaps it has already happened, we will see appointed a person whose quirks break the manufactured bits of this experiment. Or, perhaps, and this is more likely, their combined flaws, strengths, and eccentricities will eventuate into the necessary demise of the manufactured elements of fiat. Or, even more likely, the elements of the universe will come together on some fateful day to bring to a natural end the manufactured bits of this experiment. Either, scarcity or acceptance or both will necessarily fail at some point. It will be caused by either man or nature. And that is a certainty. And whether that occurs within the next 10 years or 1000 years, is neither interesting nor relevant. Only the possibility that it can and will happen are notable.
To wit, fiat is not money. Paper money that represents gold is not money. Gold is not money. Silver is not money. Neither is the Yap stone money, nor wampum, nor clams. Rather, these are merely like money. But they all fail as money qua money. Rather, they are or have been good enough as money to stand in its place. But they all fail as a result of the natural order. They usually fail on some dimension of the function of money, and they usually fail on some dimension of the necessary features that serve the function of money. As such, the closest thing that we have ever had to money itself is fiat.
But then, I think it's worth reexamining the features of money itself. Money, we say, must be durable, portable, divisible, uniform, in limited supply, and highly accepted. But this is merely a list of features that we have discovered are important in money. And each of them are spectrums. All things are portable. Some things require a semi-truck to move, however. Bread is divisible, but it isn't good money because it fails the test of durability. Cigarettes are not durable nor divisible nor uniform (fungible), but they are often used as money in places where currency fails. It is to say that sometimes, even non-durable, non-fungible, non-divisible items are better than a failed fiat. But the Universe has presented a new way to maintain a ledger of accounts that is durable, infinitely portable, infinitely divisible, absolutely uniform, limited by its nature. Additionally, the political atmosphere of the United States has unconvered a new problem with fiat currencies that were obviously there, but were previously thought to be off-limits. But the cultural milieux has validated the violation of what was once considered by a norm to be off-limits.
This is to say that modernity has revealed two new features that we did not know about that are necessary to the functionality of money: money must be digital and money must be neutral. Perhaps portable could be swapped with digital. And perhaps neutrality is an extension of uniformity. But this is not necessarily so. Although, we are discovering, one aspect of neutrality is anonymity, again, potentially a feature of uniformity. And this is because of the political atmosphere in the United States and globally. We have observed the phenomenon over time in numerous countries. In Cypress, for example, the banks confiscated enormous amounts of wealth. The United States has begun confiscating money from dissident voices like Nick Fuentes. Banks are complicit, and the digital nature of the US Dollar makes it costless for the United States to confiscate the money. Likewise, the government's control of a digital dollar makes portability of the currency manufactured. Whereas one can take a paper dollar and move it anywhere they want, countries with digital ledgers can restrict the outflows of money because the digitization of the currencies necessitates that individuals keep their money inside of institutions, and institutions are necessarily burdened by regulatory compliance. No matter where they are, no matter the request, they are beholden to the government that they are under.
Digitization of currency is not a universal good. In fact, in the case of fiat money, digitized fiat creates a new set of problems. While we have identified the aspects of fiat that are manufactured, digital fiat exacerbates a number of the risks that result from the manufacturing of money and introduces a new problem entirely. Whereas cash can be removed from a centralized institution, digital fiats, in a world without paper fiats, can not be easily moved. The digitization breaks portability, which should be surprising, given that digitization makes the units of cash infinitely small. However, this is the reality of digital, institutional money. The reason is that there is no settlement with the user. The user themselves must rely on institutions to net and settle with among themselves. The user is subject to a sort of second layer of compliant instruments that are compatible with the base system. These are credit cards, debit cards, checks, and other financial instruments. The result of digital fiat is an inability to settle with the user outside of an institution's regulatory compliance. One can not, in this scenario, hide their cash in their mattress. Nor can one transact with users outside of the system. Buying drugs is hard in this system unless your dealer takes VISA or Mastercard. Likewise, as is the case in countries like Venezuela currency controls can prevent the exportation of value from within a fiat system.
If it is true that the features of money must include neutrality and digitization, it would necessarily mean that fiat money is unfit for its role. It is too subject to the trappings of the political winds. And digitization, when enacted by the government, makes neutrality, portability, uniformity, and scarcity mere, temporary choices. Likewise universal acceptability is subject to political whims and shifts in culture.
High acceptance is an interesting feature of money, insofar as it also exists on a spectrum. To date, countries that print local currencies (which nearly every country does), accepts that acceptance within one's own borders is enough to meet this standard. And this is true for most people. However, this is a point of friction in many systems. Remittance flows prove this. Sending money from one country to another is rife with fees and regulatory hurdles. One can not simply take $100 US Dollars and send it to their friend in Ukraine. Rather, one must use an institution to take the US Dollars, send it to their partner in another country, where their friend can receive $100 minus any fees worth of their own currency. This inefficiency plagues many families all over the world who see their wealth confiscated through these regulations. A world with multiple currencies, all of which are highly accepted (meaning within their borders) is expensive. The most efficient scheme would necessitate a single currency. This would be the least frictional way for the world to trade.
So the question would be whether there is something that can be used as a medium of exchange, a unit of account, and a store of value, that is digital, neutral, durable, portable, divisible, uniform, in limited supply, and can become highly (universally) accepted. Such an asset would be truly miraculous. And were it to exist, it would be the first asset in the history of the world that, as a matter of nature, fulfills all the features of money. Perhaps, one day, we will find such a digital instrument.... Perhaps.