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Money Problems: Coinage to Crypto #9

November 23, 2018

Money Problems: Coinage to Crypto #9

The first American Colonists faced a problem: They didn’t have enough currency. At first, the Colonists bought far more from Britain than they sold to it, and pretty soon, the Colonists had no liquidity at all.

So the Colonists fashioned their own. They used tobacco, rice or Native American wampum as temporary currencies. They also used the Spanish dollar, a silver coin that was, at the time, the most widely used currency worldwide. (The terminology stuck: This is why the government later decided to call its currency the “dollar” rather than the “pound.”)

A young Ben Franklin decided that the United States needed more. He’d noticed that whenever a town got an infusion of foreign currency, business activity suddenly boomed—because merchants had a trustworthy, liquid way to do business. Money had a magical quality: “It is Cloth to him that wants Cloth, and Corn to those that want Corn,” he wrote, in a pamphlet urging the Colonies to print their own paper money.

This tension went all the way to the drafting of the Constitution. James Madison argued “nothing but evil” could come from “imaginary money.” If they were going to have currency, it should only be silver and gold coins—things that had real, inherent value. John Adams hotly declared that every dollar of printed, fiat money was “a cheat upon somebody.” As a result, the Constitution struck a compromise: Officially, it let the federal government mint only coins, forcing it to tether its currency to real-world value. As for the states? Well, it was OK for financial institutions in the states to issue “bank notes.” Those were essentially IOU’s: a bill that you could later redeem for real money.

In the 1860s, the federal government passed laws establishing a national banking system. They also established the Secret Service—not to protect the president, but to fight counterfeiters. And by the late 19th century, you could wander the nation spending the American dollar more or less confidently in any state.

Bitcoin—and today’s other cryptocurrencies—solve old problems of currency and create new limits on how it’s used. The blockchain—that accounting of every transaction, copied over and over again in thousands of computers worldwide—makes falsifying a transaction unbelievably impractical. Many cryptocurrencies are also created to have a finite number of coins, so they can’t be devalued, producing runaway inflation. (The code for Bitcoin allows for only 21 million to be made.) So no government could pay for its military ventures by arbitrarily minting more Bitcoin.

This is precisely what the libertarian fans of the coin intended: to create a currency outside government control. When Satoshi Nakamoto, the secretive, pseudonymous creator of Bitcoin released it in 2009, he wrote an essay savagely critiquing the way politicians print money: “The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.”  Perhaps the problems with money debated by the founding fathers of the United States and the problems associated with cryptocurrencies are not problems at all.  These are the points of contention at the heart of all fiscal systems - and those which are inherent to their respective successes. 

It’s also fascinating to contemplate how this new potential replacement for money could impact what we all consider real money — precious metals. And whether we like it or not, the price of precious metals does have an impact on the rare coin market. 

Reference: https://www.smithsonianmag.com/innovation/founding-fathers-money-problems-bitcoin-180968393/ 





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