Barter to Bitcoin and the Future
By: Shivendra Misra
Tags: Fiat, Crypto, Bitcoin, Money, Blockchain

This was originally published on shivendramisra.com/blog

Money. Money is what we all want. Money is what we all need. Money decides how we live. Money decides what food we eat.

But, in our busy lives, have we ever thought about what money is actually?

The 10 dollar bill that you have in your pocket, the gold ring that you’re wearing in your hand, or the plastic card in your wallet?

“All money is a matter of belief” — Adam Smith

While money seems so common today, humanity did not start with money. As we all know, we started with barter. People used to take what they want by giving what the other person wants. In basic economic theory, we call this “double-coincidence of wants.“

But soon, people figured out that the system is flawed. They would not always find someone who has what they want and is also willing to take what they have. Plus, there were other problems like portability and divisibility — a cow is not very portable and cannot be divided into smaller pieces to buy anything.

So people started thinking,

“What is that everyone wants, is portable and divisible?”

Seeds! Dried Corn! And various other commodities.

This seemed like a good option, but the problem is that seeds get perished over time. If the value that your possessions have become zero in some time, why would you want to store your wealth in them?

So what is something that everyone wants, is portable, divisible and can be stored for a long time?

Metal. These commodities acted as currencies for a long period of time. Metals like gold, silver, and bronze had all the above properties and were scarce, which gave them their value.

When people had problems storing the metal coins, they deposited it with temples who then gave them a receipt which was a proof of ownership.

The receipts soon changed into paper currency and the temples were replaced by governments. Paper currency was easier to store and carry for most people. But who was keeping this gold? The government, of course.

Till this point, the paper currency held its value because it is backed by something scarce like gold. This is called the “Gold-Standard.”

So why don’t we see the gold standard today?

Nations started getting richer and wealthier day by day. If this rise in wealth was not complemented by an increase in the money supply (by printing more money of course), the nations would enter a deflationary situation. However, to print more money they had to ensure that all their currency was backed by gold.

If pieces of paper are not backed by gold, what are they even worth? But there was certainly not enough gold in the world to back the money supply of all the nations. Additionally, since America was in a trade deficit, all the gold which America had would be exported to other countries.

Thus, the system was not sustainable for the long run.

Amidst all the spending requirements and the need of nations to generate more money, the gold standard was no more attractive to the developed nations. As a result, they called it a day.

Fiat Currency enters

Soon after the second world war, the Bretton Woods Agreement decided to shift from the gold standard to fiat. Which simply meant that instead of pegging their currencies to gold, the countries would peg their currencies to the US dollar. The US government had also severed all links between the US dollar and gold by 1971.

But if the currency was not backed by gold, how did it get its value?

From tax liabilities.

Governments essentially made it a law for all transactions to take place through a particular currency as well as demand taxes in the same currency. Thus, the value of fiat is decided by the governments and not by some asset having an intrinsic value.

This meant that governments could print as much money as they want. If their expenditures are not met by the tax revenue, they do what? That’s right, they print more money!

Okay, so now all we have is just a piece of paper, with no commodity attached to it. But money cannot exist in a vacuum. Though the government forces us to use fiat currencies for our everyday transactions, it can fail.

Currency notes tend to wear off over a period of time. You cannot carry money to make big purchases. Consider buying a house by giving piles of cash or buying an item worth $100 with 400 coins of 25c each — hardly any seller would accept that. Consider sending $100,000 to someone in a different country just by wrapping it up in an envelope.

I think you get the point.

What we needed is a system to record our ownership of funds and help us store and transfer value easily. Are you thinking about the same thing as me?

Yes, that’s right, we needed banks.

In a lot of ways, banks make our lives easier. They help us have access to credit facilities, store huge amounts of money with them which is impossible for us to store ourselves and also provide us with interest on our deposits. A good deal right?

Maybe Not

Banks are not angels from the heaven who exist to make your lives easier (though it may feel so). Banks are businesses at the end of the day and their aim is to make tons of money. The money the depositors keep in the bank is used to give loans to other people. It is just like a money lender who wants more money to lend.

So the banks give us interest on our deposit for the trust that we place in them. The bank then loans that money to other people and earn their income from the difference in the interest received vs the interest paid, called the spread.

But there is one more way banks make money — by selling the loans as financial assets, as we have previously seen in the 2008 financial crisis.

The credit crisis of 1772, the great depression of 1929, the Asian crisis of 1997, the 2001 dot-com bubble, and the most recent financial crisis — the 2008 Subprime mortgage crisis — are all examples that show how poorly banks have handled our trust.

And there is no guarantee that we won’t have a crisis again.

The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. — Satoshi Nakamoto

But what choice do we have?

I don’t think you would want to trade cows, horses, and seeds as we did before. We need a new alternative. Someone smart needed to come out with yet another form of money.

A Quest to Find a New Form Of Money