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Money is more than just a tool for trade; it is a cornerstone of society and a device for trust that allows cooperation among individuals who may otherwise have no reason to trust one another. It bridges the gap between untrusting parties by serving as a mutually agreed-upon medium of exchange, a store of value, and a unit of account. Money’s role in society is rooted in its intrinsic properties, which make it a reliable and functional tool for economic activity.
The six critical characteristics of sound money are:
- Durability: Money must withstand the test of time and the elements.
- Portability: It must be easy to transport and use.
- Divisibility: Money should be divisible into smaller units for various transactions.
- Uniformity: Each unit of money must be consistent and recognizable.
- Scarcity: Money must be limited in supply to retain value.
- Acceptability: It must be widely recognized and accepted as a medium of exchange.
These properties form the foundation of money’s effectiveness. Over time, as societies evolved and economies became more complex, these characteristics shaped the various forms of money, from shells and metal coins to fiat currency and, eventually, Bitcoin.
In this blog post, we will explore the history of money, starting from its earliest forms as collectibles and primitive currencies, to the manipulation of money supplies and its consequences, the rise of fiat money, and the advent of telecommunications that paved the way for digital money like Bitcoin. Through this journey, we will examine how the trust inherent in sound money has been repeatedly challenged and redefined, ultimately leading to the emergence of Bitcoin as a modern solution to age-old problems.
The Origins of Money: Trusting Nature and Energy
Nick Szabo’s seminal essay, Shelling Out, highlights the evolutionary origins of money as a tool to foster cooperation and solve problems of trust among humans. Early humans faced challenges in reciprocal altruism and kin altruism, which often required a medium to store and transfer value1. This medium needed to embody trust, derived not from the individuals themselves, but from their mutual reliance on nature’s immutable properties.
Primitive societies used objects such as shells, beads, and other collectibles as proto-money. Among these, shells stood out for their durability, portability, and scarcity. Wampum, made from clam shells, was widely used by Native American tribes and later adopted by European settlers in North America1. Shells were not merely decorative but held intrinsic value due to the labor and skill required to harvest and craft them. Their scarcity and durability made them a reliable medium for storing and transferring wealth. Human beings didn’t have to trust one another to trade, they only had to trust in mother natures’ laws to ensure that the token of trust they were exchanging could not be easily counterfeited.
In ancient Mesopotamia, the Sumerians used clay tablets and tokens to record transactions. The tablets serve as the oldest evidence of writing on earth. These served as an early form of accounting, enabling complex economic activities2. The invention of writing in this context underscores the critical role of money as a tool for managing trust and ensuring accountability in growing societies. Furthermore, it highlights the importance of money in holding properties that ensure its record cannot be changed to ensure trust amongst parties.
The Manipulation of Money Supply: Consequences and Lessons
As economies grew more sophisticated, so did the ways in which money was managed—and manipulated. The Roman Empire provides a notable example. In the third century AD, under pressure from external invasions, plagues, and rising military costs, Roman emperors were in dire need for more money, and they debased the silver content of their coinage3. While initially effective in raising funds, this practice eroded trust in the currency, leading to inflation and economic instability. By the time of Diocletian’s Edict on Maximum Prices in 301 AD, the Roman monetary system had largely collapsed, illustrating the dangers of undermining the intrinsic value of money3.
The story of fiat money in China offers another cautionary tale. During the Song dynasty, paper money emerged as a convenient alternative to cumbersome metal coins. However, the ease of printing money led to overissuance. Though the paper JiaoZi (交子) were initially backed 100% by copper, the temptation to manipulate the money supply was too great. Eventually, only 29% of the circulating paper was backed by real copper4. This resulted in hyperinflation and the eventual abandonment of paper currency. This pattern repeated itself across different cultures and eras, highlighting the inherent risks of monetary systems not anchored to tangible value.
When money can be easily created without energy and effort, those who wield such power will do so, at the detriment to the broader society. Without the requirement for energy as a backbone for the creation of money, trust quickly erodes. Similarly, if something that was once trusted (the denarii) is manipulated into something that is found to be fraudulent (the antoninianus), then destabilization in a society quickly follows.
The Rise of Fiat Money and its Challenges
Fiat money, backed by government decree rather than intrinsic value, became the dominant form of currency in the modern era. While fiat systems offer flexibility and facilitate economic growth, they are vulnerable to mismanagement. The 20th century saw numerous instances of hyperinflation, from Weimar Germany to Zimbabwe, where excessive money printing destroyed the purchasing power of currencies and destabilized economies and societies.
Lyn Alden, in her book Broken Money, traces the rise of persistent fiat money to the advent of the telecommunications age. As technologies like the telegraph accelerated the pace of trade, the physical movement of gold lagged behind. Banks emerged as intermediaries, batching transactions and settling them with gold less frequently5. This shift made fiat money increasingly preferred, but it also disconnected currencies from the finite backing that once ensured their value, allowing banks to more consistently issue currency that was not fully backed by the gold held in reserves.
Telecommunications and the Need for Digital Money
The telecommunication revolution created unprecedented opportunities for economic activity but also exposed the limitations of traditional monetary systems. Gold, though durable and scarce, was ill-suited for the speed and scale of modern trade5. Fiat money, while more adaptable, lacked the finite nature that made gold a reliable store of value.
This disconnect paved the way for Bitcoin. Combining the scarcity and durability of gold with the speed and portability of digital technology, Bitcoin represents a new form of money designed for the modern age. Its decentralized nature and proof-of-work system ensure trust and security without relying on intermediaries, addressing the flaws inherent in both fiat and commodity-based systems5. Just like all previous forms of trusted money, it takes energy to create bitcoin. With energy backing the system, it can be a form of money that can be trusted by everyone because everyone knows that it cannot be easily counterfeited.
Conclusion: The Enduring Importance of Sound Money
The history of money is a testament to its vital role in fostering trust and enabling cooperation. From shells and clay tablets to fiat currency and bitcoin, the evolution of money reflects humanity’s ongoing quest to balance convenience, security, and trust.
Book a call today to participate in the security and trust of the Bitcoin network.
As we navigate the complexities of the digital age, the principles of sound money—durability, portability, divisibility, uniformity, scarcity, and acceptability—remain as relevant as ever. Bitcoin, as a culmination of these principles, offers a glimpse into the future of money, where trust is decentralized, and value is preserved through the immutable laws of mathematics and energy.
References
1. Szabo, N. Shelling Out: The Origins of Money. Satoshi Nakamoto Institute https://nakamotoinstitute.org/shelling-out/ (2002).
2. Nissen, H. J. The emergence of writing in the ancient near east. Interdiscip. Sci. Rev. 10, 349–361 (1985).
3. Kallmes, K. Imperial monetary policy and social reaction in third century Rome. J. écon. études hum. 24, (2018).
4. Durani, F. Y. The Life Cycle of Fiat Money: An Insight into its History and Evolution. Journal of Indian Research.
5. Alden, L. Broken Money: Why Our Financial System Is Failing Us and How We Can Make It Better. (2023).
