cryptocurrency, bitcoin, ethereum, crypto
“The present is the past rolled up for action, and the past is the present unrolled for understanding.” – Will & Ariel Durant
As per homo sapiens' availability biases, a course of events seems unlikely if we haven't experienced and can’t easily imagine them.
While studying history is fraught with risks (e.g. narrative fallacy), doing so may give us better ability to gauge whether a trend will take root.
The creation of an international private currency seems improbable, right? It's never happened before, right?
Like, Craig Wright wrong.
Throughout this post, I use the terms "currency," "credit," and "money" interchangably, and I think by the end you may understand why. Money, at its heart, is a system of credit. Currency, as most people use the term, is simply an incarnation of money, whether in metal, paper, digital or other form.
Sidenote: this post is long, I know, I'm sorry. If you want to skim, I suggest reading “Free Banking Era”, “1600s England” and “Implications”.
Free Banking Era
Currency supply in the US used to look vastly different than it does today. Starting in the 1800s, the US experienced the Free Banking Era. States, municipalities, private banks, railroad companies, restaurants, churches, and even individuals could and did issue their own currencies. Often, this was necessary to solve problems like the lack of small-denomination notes (see below). Whether the currency was reliable depended on the reliability of the individual, church, etc., that issued it.
Scrip is a form of privately issued money or credit.
Remote Scrip. In the 1800s, merchant companies like mining and logging camps developed scrip while in remote areas that lacked sufficient cash on hand. These companies would pay workers in “company scrip” that the workers could use at company-run stores, or could exchange for cash at a discount.
Scrip was also heavily used in the Great Depression to pay wages.
Fun Scrip. Disney dollars are a good example of corporate scrip; up until 2016, you could buy and use the dollars at Disney parks, stores, cruises, etc.
Small Scrip. In the 1800s, private companies and merchants in the US issued small-denomination currencies because banks were prohibited from issuing notes smaller than $1.
Loyalty Scrip. Any “loyalty” card you have with a store is scrip. Every time you go your coffee shop and get a hole punched on your loyalty card, that café is effectively giving you fractional “coffee scrip.” Bet you never thought of that as currency.
These kinds of private scrip have failed in the past mainly because they were limited to local economies and lack of trust of the issuer.
Ireland’s banking system went on strike after a labor dispute in 1970. Banks just…closed. For half a year.
A personalized, private credit system evolved in its place. This system was able to evolve thanks to local networks of businesses, most notably, pubs. Pub managers knew the locals and could act as judges of a person's trustworthiness. Around $4.5 billion USD in transactions occurred in those months, sans problem. Incredibly, the Irish economy continued to grow during this period.
In the 1990s, The Russian government imposed austerity measures on companies that had survived on Soviet subsidies. Merchants responded by creating their own monetary network to settle trade; by 1997, around 40% of inter-company trade was settled privately, without use of fiat.
In 2002, Argentina stopped pegging its peso to the dollar, causing its currency’s value to collapse and leading to a run on the bank a la the Great Depression. In the aftermath, provinces, cities, and private businesses like supermarkets all issued their own privately-backed credit. By March 2002, nearly one-third of all money in Argentina was privately issued.
Local Exchange Trading Schemes (LETS)
A LETS is a “locally initiated, democratically organized, not-for-profit community enterprise that . . . records transactions of members exchanging goods and services by using locally created currency.”
Simpler definition: LETS are like local banking systems that issues their own currency.
Ithaca Hours. One good example is the Ithaca Hours currency used in Ithaca, New York, which was has been around for decades and defines value in terms of hours worked (i.e., their bills are denominated in “quarter hours”). Its use has declined in recent history, though, which is partly attributable to the growing domination of digital transactions.
BerkShares. Another similar example in the US is BerkShares in the Berkshire region of Massachusetts.
WIR. Switzerland has the WIR credit network, which is a private, electronic currency system complementary to the country's fiat. To give you an idea, in 2005, the WIR system handled around $6.7 million USD worth of transactions.
Others. These two examples are far from an exhaustive list. LETS exist in the U.K. (LETSLINK UK, London LETS), France (Système d’Éxchange Locale), Germany (Tauschring), Norway (LETS Norge), Japan (Peanuts system), South Korea (Hanbat LETS), Ecuador (Ecoisima Groups), South Africa (Community Exchange System), Hungary (Community Service System), the Czech Republic (Roslet’se, Pralets), the Netherlands (NOPPES), Australia (Australian Community Exchange System)….you get the idea.
The "shadow banking system" refers to the private financial system that has been growing over the past few decades and came to light in the 2008 recession.
Former US Federal Reserve Chair Ben Bernanke defined it as “institutions and markets that, collectively, carry out traditional banking functions – but do so outside, or in ways only loosely linked to, the traditional system . . . . Examples . . . include securitization vehicles . . . , money market funds . . . , investment banks, and mortgage companies.”
Financial institutions provide their own credit, which is not based on deposits they hold (unlike traditional banks). In essence, they “create” a credit system outside of fiat money.
A good example is mortgage-backed securities; financial institutions packaged and repackaged these in ways that allowed that to multiply the money (aka, credit they could provide) on their books. (Read The Big Short for an excellent breakdown of how this works).
Shadow banking isn’t per se a bad thing, though, so don’t associate it purely with the 2008 recession. But it is a good example of how we live in a time where privately issued money is all around us: in 2010, the shadow banking system was worth about $60 trillion.
In Florence in the 1500s, the origin of what you might call the banking system emerged.
It took the form of an international, private credit system (denominated by the ecú de marc) between merchants. On an international scale, merchants would use this private money to buy and sell goods and services. Then, every quarter at the Lyons fair, they would gather to clear and settle their credit. This system greatly enabled cross-border commercial transactions between European regions.
So cool, we've got an international, privately-issued money system here.
Fast forward to England in the late 1600s. The country was in a rough spot. King Charles II had defaulted on his debts in 1674, collapsing the government's credit, and the country continued to rack up copious war debt.
The people lost faith in the government's ability to meet its financial obligations. This meant the government could only get loans on terrible terms.
The government desperately needed the help of creditors to meet its financial obligations. But it found, increasingly, that it could not strong arm the ecú de marc system that was a key source of the credit it needed.
To solve this SNAFU, the merchants and government reached an agreement; both sides agreed to create the first public-private partnership bank in 1694. The bank would be managed independently by private merchants and get the right to issue sovereign-backed money. In return, the government would get the ability to borrow on bank deposits.
This new institution was dubbed The Governor and Company of the Bank of England. This was the birth of the Bank of England.
And the Bank of England, in many ways, was the precursor to the Federal Reserve.
Let's sum this last one up, shall we?
Ouroborus, anyone? History is rhyming.
In a sense, the Bank of England was a fork of a fully government-controlled finance system. And the Fed was a fork of the Bank of England.
And, in a sense, crypto is a fork of the Federal Reserve.
First, private money is not new.
Second, private international money is not new. It has successfully existed for centuries. Crypto like Bitcoin is just the first large-scale, digital form of private money.
Third, private money most often arises as a necessary solution to a problem, including:
Fourth, one key limit to private money historically has been its limit to a local economy. This is clearly not a limit for crypto.
Fifth, non aes, sed fides ("Not metal, but trust"). The other key barrier for private money is trust. When an economy's trust in an issuer fails, the money will fail (whether private or fiat).
This is not a problem for crypto, since its architecture does not require you to trust any issuer.
Hidden in discussions of trusting a currency is the discussion of trusting the form. Will the paper money hold up? Can the coins be easily counterfeited?
So why should you trust the first large-scale, digital forms of money?
Because you already do: as of 2011, around 90% of US and 97% of UK money has no physical existence.* It’s just the balance your bank tracks for your account. And most of those balances are just digital.
Private money has existed regularly and consistently throughout history, including present day.
Digital money is ubiquitous, even for those who don't use services like Paypal.
Like much of innovation, crypto is simply a combination of precedents, some old, some new.
*See Money: The Unauthorized Biography, p. 15, by Felix Martin.