The invention of Bitcoin by Satoshi Nakamoto might fit in the broad history of Money as a landmark creation, as it could end up marking the genesis of a revolutionary system that changes how future civilizations construe what money is. This would be a natural occurrence, as humans’ interpretation of what ‘money’ is has been revolutionized constantly throughout history. Money is a social technology that facilitates trade and functions well when it is transportable, difficult to fraud, divisible and desirable. Bitcoin appears to satisfy all these criteria. However, money causes problems when it becomes society’s focus and may function better when regulated by democratic governments.
Contrary to the commonly held belief ‘not a single researcher has been able to find a society, historical or contemporary, that regularly conducted its trade by barter.’[1] The economy of Yap, a remote and inaccessible inhabited island (unknown to the world until 1869) helps explain why. Yap’s market had only three products -fish, coconuts and sea cucumber, so a bartering system would seemingly have been really viable there. However, Yap had a highly developed system of money, involving fei – ‘large, solid, thick stone wheels ranging in diameter from a foot to twelve feet’. [2] American adventurer William Furness visited Yap in 1903 and documented ‘the noteworthy feature of this stone currency is that it is not necessary for its owner to reduce it to possession.’ [3] Thus, the monetary system in Yap emphasises how unique and advanced monetary systems can be relative to the markets they serve.
Findings of modern anthropologists discern that money emerged as a system of updating debt and credit (not as a commodity) in Ancient Civilizations. In 3000 BC Mesopotamia, people recorded transfers of commodities on clay tablets, and then developed their monetary system by using symbols. The pioneering city of Uruk flourished in Mesopotamia and has even been described as ‘the Silicon Valley of the Ancient World’ [4]. This society by 700BC became part of Ancient Greece’s civilization, that formed the world’s ‘first bureaucratic society – and its first command economy’ [5] and this region has been credited with inventing numeracy, accounting and literacy but not money.
Money arose from multiple cultures mixing, requiring Mesopotamia’s system of accounting and the ‘idea of a universal scale of value incubated in the barbaric West ’ [6] to combine and lead to the final requisite defining Ancient Greece’s money: ‘the principle of decentralised negotiability.’[7] This is highlighted by how in 350 BC Aristotle saw money as both a commodity and something that was socially symbolic. He described how ‘it exists not by nature but by convention, and it is in our power to change it and make it useless' [8] and noted ‘for the purposes of barter, men made a mutual compact to give and accept some substance… (as) a useful commodity, was useful to handle in use for everyday life, iron for instance’ [9].
In contrast to decentralised Greece, in Ancient China, under the rule of Duke Huan of Qi, monetary theory developed that would ‘attain near-canonical status in Chinese economic thought for the next two thousand years’ [10], implementing money as ‘a tool of the sovereign’. The cogitation that led to such beliefs have been best summarised by the 113 j u of Economist Sang Hongyang - ‘if the currency system is unified under the emperor’s control, the people will not serve two masters.’[11] This ancient Chinese civilization have been credited with inventing governors who govern the scale of minting permitted.
It can be argued, Bitcoin is therefore a modern swing back to the people, as modern-day monetary system are heavily centralised like in Ancient China, when perhaps society is advanced enough to prosper without interference from central banks, tasked with managing the economies by controlling countries’ money supply. That said, Bitcoin was designed by Satoshi to complement current legal systems and therefore the shift Satoshi envisioned it should provoke might not be that dramatic.
In medieval Europe, the Roman Empire made one denarius (melted silver) worth one day of work. This silver’s symbolic power allowed divergence between intrinsic value and nominal value to be made, and its precious metal content acted as a lower limit to seigniorage. However, as the silver over time became poorer quality and parts of denarius coins were chipped off to make fraudulent coins, eventually inflation occurred (a day of work cost two denarii). Furthermore, the Roman elite engaged in sophisticated borrowing and lending with paper records which unsurprisingly led Rome to experience unstable inflations, deflations and credit crises. Nicolas Oresme, a French philosopher and mathematician stated in 1360 ‘Can any words be too strong to express how unjust, how detestable it is, especially in a prince, to reduce the weight without altering the mark?' [12]. Thus, Satoshi’s belief that money should be decentralised/free from interference is not a revolutionary idea at all, having been adopted by many contrarians over the past millennium.
The English implemented tally-stick technology, whereby people could record how much was owed to them and by date, through marking notches on sticks (originally bones) and splitting the sticks them in half. The English government began to borrow money with this technology. Linking to this, banks soon emerged in the middle ages, and at the fair of Lyons in the 15th century, principally Italian merchants traded millions, ‘without a single sou changing hands’ [13], using bills of exchange - promises of payments in gold and silver coins, carrying default risk by the issuer. The House of Medici was an Italian banking family and political dynasty that first consolidated power in the Republic of Florence during this time as a result of their trustworthyness and the advancement of bills of exchange, which served as ´ an accelerant to the velocity of money´ and which ´greatly increased the elasticity of money; coins cannot be fashioned out of thin air, but bills could´. [14]
The first money market came into existence in 1531 in the form of the Antwerp Bourse (note that the word for “stock exchange” is bourse in French). Whereas, beforehand holders of bills of exchange had to wait months to present bills and collect cash, the money market at Antwerp presented oportunities for bill-holders to cash in their bills at a discounted price to bankers before they matured. ´This type of discounting by money market traders in Antwerp brought alive the time value of money on a daily basis. Paper money finally had a price for the world to see.´ [15] Furthermore, promissory notes began circulating at the Bourse in order to settle any outstanding balances at the end of the day. ´These instruments were the direct predecessors to what we consider paper cash today, currency notes. They were groundbreaking in their lack of specificity; previous versions of second-layer money always had people’s names on them. Notes, like cash today, were completely free of this construct.´ [16]
In addition, it was in Antwerp that the interest rate arbitrageur had arrived. Whilst bills of exchange and promissory notes themselves had become an asset class with prices quoted by the world’s first financial newspapers, the way to compare all these instruments was ´not in terms of their individual prices but based on the interest rate one could earn from holding that paper.´ [17] Bankers took advantage of the arbitrage opportunities presented by interest rates on every piece of paper in the Bourse, leading to increased discounting and trading of bills and increased liquidity in paper money.
Merchants historically have been entrepreneurial and created Fractional Reserve Banking is the early 14th century: ‘holding only a small proportion of their assets in coin of the state.’[18] Central banks emerged soon after Merchant banks, and they were to issue what the rest of the world considered to be its reserve currency. First of all, the Bank of Amsterdam (BofA) was founded in 1609, thanks to the creation of the world’s first joint-stock company, the Dutch East India Company (VOC), which had made the Bourse in Amsterdam, the most influential in the world. ´The VOC was the first example of equity investors providing capital in exchange for a share of ownership in the form of a paper certificate. The Dutch government gave the VOC a monopoly on trade in Asia as well as the authority to hire troops and wage war on its mission to extract profit from foreign trade.´ [19] The BofA lent money to the VOC and classified the loans as assets on its balance sheet, a standard double-entry accounting practice. By crediting the VOC with deposits, the BofA was essentially creating money and issuing it to a borrower of privilege, and replacing gold and silver with the equally trustworthy VOC loans as the principal reserve for their deposits- the first central bank franctional reserve banking system was in place.
Moreover, the BoA’s first act was by decree to outlaw cashiers in the city and their notes, and to mandate all gold and silver coins throughout the city be deposited at the bank, where previous owners were issued BoA deposits in return for their precious metals. This was total revolution as cashiers previously adminstered thousands of coins in circulage in Amsterdam and ran the city from a financial perspective. They were eventually allowed to reopen businesses years after their ban but were only allowed to have possession of coins for a single day before being required to deposit them at the BofA. Essentially owning coins of value had been made ilegal. Thus, in Holland a global stock exchange had been created based on paper money and monopolies, replacing large trade in silver and coins, and a first fractional reserve banking system was implemented so successfully by a central bank, that their unit of account, the guilder, became ´considered the world reserve currency during the seventeenth century because merchants and businesses from all over Europe held it in reserve due to uncompromising trust in its issuer´ [20]. More to the point, ´the BofA was a regulatory response to stock trading and a way for the government to monitor every single transaction taking place amongst its depositors.´ [21] It´s realistic to believe the time has come now for a digital money market to finally replace the paper money market, given the dangers of fractional reserve banking have been shown now to be so great as to put in jeopardy the whole world, and that bankers and accountants will be replaced by block-chain financial experts and cryptographers, with the technology containing the blueprint required so that governments can better monitor transactions taking place, currently hidden by the offshore tax haven global system. Information of every transaction taken place using Bitcoin is stored forever on the chain.
However, created in 1694 the Bank of England (BofE) became the first bank whose sovereign and government had bestowed powers permitting it to govern money supply and issue the currency, on the condition that it favorable lent money to them and supported them in tempestuous times. In 1717, as Master of the Mint Sir Isaac Newton set a new exchange rate between gold guineas and silver shillings that drove silver out of usage, although it would take over a century for a full gold standard, with which the pound became valued only in gold, to become law. Formalised or de facto, Englands gold standard was mantained from 1717 till the 20th century by the BofE setting interest rates to ensure that sufficient gold was attracted to London to maintain convertibility. ´England’s gold standard reverberated throughout the world and eventually pulled every major country’s currency into the same sphere´ [22] , and as England was the economic powerhouse of the world with its empire, the pound was the global reserve currency from the 1700s up till the Second World War.
Prior to the BofA and BofE, bills of exchange were monetary instruments that were promises to pay gold. During the BofE era however, bills were promises not to pay gold but to pay pounds. ´In the charter renewal of 1742, the BoE cemented its monopoly specifically over note issuance in England. The private sector was no longer allowed to issue second-layer notes that promised to pay the bearer gold on demand´ [23]. The assets of the BofE were gold and uk bonds, and their liabilities were BofE deposits, BofE notes. The private sector (banks, businesses, entrepreneurs) used these (BofE deposits, BofE notes) as their assets and had as their liabilities deposits and bills of exchange based on the pound. Synchronisation is the split between how much gold, silver and alloy metal banks kept in store vaults and how many notes (“I owe yous”) were in circulation. ´Bank of England notes are elastic because they are fractionally reserved; they are issued in excess of the gold held in the BoE vault. This elasticity is compounded when the private sector issues deposits that promise to pay BoE notes, and those deposits themselves are only fractionally reserved by said notes.´ [24] As Bonds and debts began to be used, bank’s ‘maturity gap’ [25] (loans made being paid back far later) began posing problems, as banks had to reassure the public their reserves covered any potential defaulting loans. The Panic of 1796 actually led to a run on the BofE gold deposits and to two decades of suspension of gold convertibility for all BoE notes to prevent the fall of the bank itself as a result of franctional reserve banking and synchronisation, and this suspension occured again during the First World War, a time when the strict gold standard was no longer enforced by several countries, including United States and Great Britain. Churchill implemented the British 1925 Gold Standard Act, signifying once more all paper currency was worth gold that you could claim from central bank but this was stopped by WW2. However, post WW2, the gold standard was permenantly scrapped in the UK.
Subsequent to WW2 the US dollar became the world´s most powerful reserve currency and the only currency pegged to gold. The rise of the dollar and a US central bank was far from smooth. Two separate central banks were created in 1791 and 1812 in the US, but each ended after its twenty-year charter as many early Americans didn’t trust central banks to administer their currency. However, on December 23, 1913 the US Congress passed into law the Federal Reserve System (FED), with a mandate to hold at least 35% of its assets in gold, whose notes were the dollar and whose deposits were issued only to private banks. Initially, upon its founding gold represented 84% of the Federal Reserve’s assets and the FED had no intention to own a large portfolio of U.S. government debt. However subsequently to WW1, the Fed’s gold-coverage ratio fell from 84% to less than 40%, as the FED brought rapidly U.S. Treasuries to support the US war effort, and over half the Fed’s assets became held in U.S. government bonds. When the great depression (1929-39) hit the States, the fixed amount of gold reserves and legally binding 35% gold-coverage ratio was blamed for the FED´s failure to recuperate the economy in an age of credit. During the depression, and mirroring the prohibition of cashiers following the emergence of BofA, on April 5, 1933 President Franklin Roosevelt issued Executive Order 6102 which instructed all “gold coin, gold bullion, and certificates to be delivered to the government” as Americans were prohibited from owning gold. The following year, the United States passed the Gold Reserve Act of 1934, which devalued the dollar against gold by increasing the gold price from $20.67 to $35 per ounce, in order to attract foreign investors to the dollar, at a staggering cost to US citizens forced to sell their gold a year earlier. Despite the devaluation, the dollar remained strong in comparission with all other increasingly volatile currencies.Then, nearing the end of WW2, in 1944, the Bretton Woods agreement made the dollar, with its 1934 promise to the bearer gold coins on demand at $35 per ounce, the only world currency keeping a direct link between itself and gold. Other currencies would have fixed exchange rates with the dollar and wouldn’t themselves be redeemable for gold. Thus, the dollar truly became the world´s reserve currency and most in demand currency.
The Bretton Woods agreement came to an official end in 1973 but in reality its failure was inevitable following the emergence of the Eurodollar market in the City of London in 1957. London, Paris and Zurich began issuing Eurodollars, in response to the emergent international demand for dollars as foreign nations accumulated dollars due to its world reserve currency status.. While United States citizens were banned from owning gold, foreign nations were still allowed to convert their accumulated dollar reserves to metal and eventually began converting these dollars into gold. Robert Triffin, a Belgian-born economist, had predicted that these nations would eventually deplete the United States gold stock, making a fixed price of $35 per ounce of gold impossible to maintain and this turned out to be the case, with the Gold Pool collapsing when the price officially exceeded $35 in European markets. Gold transitioned to the informal role of neutral money, and the dollar ceased to have any linkage with it. Today, gold represents less than 1% of the Fed’s assets and presently, UK and Australian Banks have ‘no reserve requirements’ [26]. Bitcoin (BTC), like gold, is a finite resource that resembles a decentralized form of money. The final block is estimated to be mined in over a century from now in 2140, but the number of bitcoin to be supplied will be 21 million BTC or 210,000 block epochs. Bitcoin acts as a base price for all digital currencies, just like the dollar has done from 1944. The appeal of Bitcoin is that it is decentralised like gold yet has the potential to be as practical, if not more so than paper currencies, and is available in this modern era of free-floating currencies now totally dependent on the intervention of central banks.
Nowadays, there are two existing systems that store value: physical and electronic. Most money is electronic and therefore not anonymous, unlike cash. Bitcoin is currently pseudonymous. Of current transactional systems, only physical cash provides cheap instant transactions. Credit/debit cards, PayPal and Bitcoin all either process charges or delay transactions. However, Bitcoin is not a stable store of real value due to speculation, whilst cash and credit/debit cards are stable stores of value, so long as central banks act responsibly. In Venezuela, Bitcoin is infinitely more stable than the fiat currency. Nevertheless, Bitcoin is very similar to credit/debit cards; for instance, pin numbers are like private keys.
Bitcoin genesis block was mined on the 3rd January 2009, right after the 2007 Financial Crisis that led to the August Northern Rock Affair, the September 2008 failure of AIG, Lehman, Merrill, the October 2008 RBS, Lloyds TSB, HBOS 37bn bailout and finally, the February 2009 Obama/Hanksom Fiscal Stimulus Plan (£790bn bailout). The crisis startingly kept bankers rich, but impoverished millions who took their advice.
Prior to Bitcoin, many cryptocurrencies came but failed. Digicash came from the 1983 White paper: ‘blind signatures for untraceable payments’ by David Chaum and was followed by Nick Szabo’s Bitgold (1998), Wei-Dai’s b-money (1998) and Hal Finney’s Reusable Proof of Work System (2003). Crucially, these came before the financial crises and unlike Bitcoin needed support from a trusted 3rd party and did not control inflation nor for double spending. This all proves that Bitcoin is a highly advanced digital payment system that may just be the next phenomenon in the history of money.
References
[1] Felix Martin, 6th June 2013, ‘Chapter 1 -What is Money’; ‘Money, The Unauthorised Biography’ [2] Felix Martin, 6th June 2013, ‘Chapter 1 -What is Money’; ‘Money, The Unauthorised Biography’ [3] Felix Martin, 6th June 2013, ‘Chapter 1 -What is Money’; ‘Money, The Unauthorised Biography’ [4] Felix Martin, 6th June 2013, ‘Chapter 2 – Getting Money’s measure’; ‘Money, The Unauthorised Biography’ [5] Felix Martin, 6th June 2013, ‘Chapter 2 – Getting Money’s measure’; ‘Money, The Unauthorised Biography’ [6] Felix Martin, 6th June 2013, ‘Chapter 3 - The Aegean Invention of Economic Value’, ‘Money, The Unauthorised Biography’ [7] Felix Martin, 6th June 2013, ‘Chapter 3 - The Aegean Invention of Economic Value’, ‘Money, The Unauthorised Biography’ [8] Aristotle, 350 B.C.E, ‘Nicomachean Ethics’, Book V, Translated by W. D. Ross, http://classics.mit.edu/Aristotle/nicomachaen.5.v.html [9] Aristotle, Politics, Section 1257a.20, Greek Text and Translations, http://perseus.uchicago.edu/perseus-cgi/citequery3.pl?dbname=GreekFeb2011&getid=1&query=Arist.%20Pol.%201257a.20 [10] Felix Martin, 6th June 2013, ‘Chapter 4 - Financial Sovereignty and Monetary Insurrection’, ‘Money, The Unauthorised Biography’ [11] Felix Martin, 6th June 2013, ‘Chapter 4 - Financial Sovereignty and Monetary Insurrection’, ‘Money, The Unauthorised Biography’ [12] Felix Martin, 6th June 2013, ‘Chapter 5 - The Birth of the Money Interest’, ‘Money, The Unauthorised Biography’ [13] Felix Martin, 6th June 2013, ‘Chapter 6 The Natural History of the Vampire Squid’, ‘Money, The Unauthorised Biography’ [14] Layered Money: From Gold and Dollars to Bitcoin and Central Bank Digital Currencies, 2021, Nik Bhatia
[15] Layered Money: From Gold and Dollars to Bitcoin and Central Bank Digital Currencies, 2021, Nik Bhatia [16] Layered Money: From Gold and Dollars to Bitcoin and Central Bank Digital Currencies, 2021, Nik Bhatia
[17] Layered Money: From Gold and Dollars to Bitcoin and Central Bank Digital Currencies, 2021, Nik Bhatia
[18] Felix Martin, 6th June 2013, ‘Chapter 6 The Natural History of the Vampire Squid’, ‘Money, The Unauthorised Biography’
[19] Layered Money: From Gold and Dollars to Bitcoin and Central Bank Digital Currencies, 2021, Nik Bhatia
[20] Layered Money: From Gold and Dollars to Bitcoin and Central Bank Digital Currencies, 2021, Nik Bhatia
[21] Layered Money: From Gold and Dollars to Bitcoin and Central Bank Digital Currencies, 2021, Nik Bhatia
[22] Layered Money: From Gold and Dollars to Bitcoin and Central Bank Digital Currencies, 2021, Nik Bhatia
[23] Layered Money: From Gold and Dollars to Bitcoin and Central Bank Digital Currencies, 2021, Nik Bhatia
[24] Layered Money: From Gold and Dollars to Bitcoin and Central Bank Digital Currencies, 2021, Nik Bhatia
[25] Felix Martin, 6th June 2013, ‘Chapter 14 - How to Turn the Locusts into Bees’, ‘Money, The Unauthorised Biography’
[26] Justin Kuepper, 25th June 2019, ‘Bank Reserve Ratios and what they mean’, https://www.thebalance.com/what-is-a-bank-reserve-ratio-1979090
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