- Ref:: Patrick Boyle
- Title:: How Cryptocurrencies Fit Into The Long History Of Private Money
- Author:: Patrick Boyle
- Year of publication:: 2022
- Category:: Blog
- Topic:: #topic.cryptoasset
Notes from reading
In the United States, the government is not the only entity legally allowed to issue money. Private citizens and businesses are allowed to do so, too, and throughout U.S. history, they have done this. This type of money is referred to as private money, and it had mostly disappeared from circulation until Bitcoin was created in 2009
While the technology underlying cryptocurrencies is new, the core idea of non-government issued money has been around a long time and usually it existed to solve problems that sovereign currency could not
Before the Federal Reserve act of 1913 and the printing of the first Federal Reserve Notes, hundreds of banks in the United States issued "thousands of different kinds of currency which were as a group the effective currency of the country". Private money was an innovation that arose to fill voids left by the government-provided or sovereign currency of the time.
Economies can’t really function if there is no way of transferring value or storing wealth. So, commodities like tobacco, beaver skins, and wampum – which is money made from a type of clamshell, served as currency at various times
Local banks additionally took in gold and gave out bank notes in return. One of the problems with this bank-issued currency was that it couldn’t circulate too far from the issuing bank, where the notes could be redeemed back into gold and silver. To make the notes more useful,some banks made deals with others in nearby cities to accept each other’s notes. If a bank went bust, its currency would become worthless.
In 1862 Congress reacted to the private money situation by forbidding private citizens or companies from issuing paper currency in denominations of less than $1. In order to avoid legal problems, private issuers of paper money began denominating their currency in services (for example, miles of railroad service) instead of in dollars.
The National Bank Act of 1863 ended the "wildcat bank" period. The government-created paper money that followed was far simpler to use than private currencies and more reliable
Cryptocurrencies are the newest innovation in the private currency space. They are decentralized private digital currencies that use cryptography to safeguard transactions and control the creation of additional units of currency. Cryptocurrencies are mostly used for speculative purposes right now, rather than as actual currencies. People are not usually being paid in cryptocurrencies, and goods are not priced in them either. Most cryptocurrencies are not backed by anything other than the faith of the people who own them unlike a lot of the historic private currencies that were at least supposedly backed by precious metals, US dollars or exchangeable into goods at the company store. Cryptocurrencies are not cheaper to transact with either, they tend to be expensive and slow.
Private currencies were historically used because they solved problems with sovereign currency. They filled in when there was a shortage of coin, when there were no small denominations, when banks closed during the depression and so on.
What problems do cryptocurrencies solve today?
cryptocurrencies first appeared in 2009 right after the global financial crisis, and some of their popularity relates to a lack of faith in modern central banking and monetary policy. They grew in popularity during the covid pandemic, and this resurgence could relate to concerns over the huge government spending to keep economies alive.
A lot of new regulation came in the wake of the global financial crisis too – things like FATCA and other anti-money laundering rules, which made transferring funds using traditional means slower and more expensive. Cryptocurrencies have been popular amongst those worried about government surveillance too, this includes criminals who wish to hide their financial dealings but also those living under oppressive government regimes. People who worry about inflation and who don’t trust the government tend to like cryptocurrencies.
Cryptocurrencies may or may not persevere in the long run, but they are bringing transformative changes to money and finance. The prospect of competition from these private currencies has pushed central banks around the world to consider digital versions of sovereign currencies.
In the long run it is unlikely that 8000 cryptocurrencies will remain in use. The exchange rate between the Dollar and the Yen fluctuates by as much as 15% year to year, even though the “fundamentals” of the two economies show much less volatility. A world with thousands of additional currencies would leave people living with exchange rate chaos. The benefits of central bank digital currencies are not obvious to me either. Even the Federal Reserve has stated that the design of such a currency, would raise important monetary policy, financial stability, consumer protection, legal, and privacy considerations.