By Dhavhesh Balakrishnan.
17 March 2020 (22 days ago)
What is money? Why do we vie for it? What happens when it loses value? Why is it that we give so much value to something that is in its essence is an abstract concept of efficient trade? These questions and many more have been asked, will be asked and will stay for as long as our forms of currency continue to exist. The story of money and its birth is one filled with mess, war, contempt and unstable success.
The first recorded use of currency as a form of trade goes back to 3000 BC wherein the shekel was used by the Mesopotamians as a form of measure of barley to precious metals. This form of currency then evolved into “metal money”, through which currency made from precious metals such as gold were used as a form of trade. What came of this, however, was the opportunism of rulers and minters of this form of currency through which they debased the currency used by introducing cheaper, less precious metals such as tin into the original form of currency which resulted in the measure of currency being of less value than the currency was claimed to be. Due to the difficulty of transporting large quantities of these coins, “paper money” was then introduced by the Song Dynasty in China during the 11th century. This form of currency was discovered to be more economically viable than the use of coins as they would not only be easier and cheaper to produce, but also leave the holder of the currency less wealthy than the issuer of the currency. As such it could be used as a form of control and power. The first recorded bank is thought to have started on the Island of Yap in 1000 AD, where one entity was given a large amount of the local currency, which was heavy and hard to carry, for a note which guaranteed the holder the return of the currency at any given time. It was primarily used as an easier method to pay taxes.
Most of our current forms of currency work on certain measures of control and what is known as a “floating exchange rate”. The UK controls its money supply via the Bank of England which makes, destroys and circulates money depending on the circumstances of the economy. This is to control (if not to prevent high levels of) inflation and such is done due to the “equation of exchange” introduced by Irving Fisher in 1911. The equation states that M x V = P x Q where M is the total amount of money in the money supply of the nation, V is the velocity of money (i.e. the number of times a year each unit of money is spent), P is the average price of goods and services sold during the year and Q is the quantity of goods, services and assets sold during the year. What this means is that if there is too much money in circulation or too much money is spent during the year, the average price of goods and services will rise. Such is the nature of inflation and why it is one of the primary objectives of a country to control it. The “floating exchange rate” allows for private entities to buy or sell currency on a private market depending on the exchange or sale of another currency. This creates a relative level of supply and demand for the currency in which if the supply of a currency is too high, its value decreases accordingly, and this is linked to both its demand and the confidence that the consumer has in the currency.
Money is currently headed towards forms of currency that are tied to no single entity, that are completely “free floating” and that is completely transparent. Such is the nature of currencies like Bitcoin, Litecoin, Ethereum and any currency that uses blockchain technology. How Bitcoin works for example is through a shared public ledger that is incorruptible and has the potential to record anything of value and this is protected via a form of cyber security using cryptography. Each transaction from the cryptocurrency must be signed by a private key only accessible by the individual to which it is allocated. The advantage of this currency is that pretty much every unit of measure can be stored and used from something as small as a computer chip. It also has no value other than that given to it by the consumer and the value cannot be controlled by anyone other than its consumers. It is this type of detachment from the corporate irresponsibility, often found in banks which caused the global financial crisis of 2008, that its consumers seek.
However, the issues with these forms of currency that are detached from any single entity is that there is no confirmation of its value. What this means is that one can hold over a million units of the currency, but those units only transfer in value to what it can be traded to in a foreign currency like the dollar. Bitcoin, for example, is currently valued at approximately 2800 GBP per Bitcoin. When it was first introduced on BitcoinMarket.com its value was 0.003 USD per Bitcoin. And the highest recorded value of it was 19,783.06 USD per Bitcoin. And that is its problem, we cannot view Bitcoin as its own entity, not like the pound or the dollar. We view it as a digital asset, a stock to be transferred into the currency that we feel will stick in value because we trust our own forms of traditional currencies more than we do something that is incorruptible.
At the end of it all, how money changes is irrelevant, but how we view it is. Because if history is any example, money will always be viewed as a means of control, power and survival. And the pursuit of money is what our society revolves around. Since the 19th century, we have used money as a means of measuring progress and although a country’s GDP is no longer viewed as the be all and end all of progress, it is still a significant part of the equation. So, it is also highly unlikely that our view of money will ever change.