In recent months, I have been trying to understand more about decentralized encrypted digital currencies, including Bitcoin, as well as the evolution of blockchain. Will Bitcoin still exist, say, in 20 years, for instance? In order to try to gain a deeper comprehension of these issues, complex, at least for me, I felt that it might be helpful to have a better idea of how the evolution of cash seems to have taken place.
The present book was given to me as a Christmas present by one of the senior officers at UBS, whose responsibilities lay within the bank’s wealth management business. This should bode well for the quality of the book’s content, I felt. This book is truly quite unusual, not full of “dry” technical facts, but rather with plenty of “astonishing tales you might tell a friend in the pub…” (New York Times). The book is indeed “entertaining” (Financial Times). Still, to this reviewer, the book seems to be solid enough when it comes to presenting and elaborating the key facts behind the history of currencies. I did undeniably come away with a better understanding of Bitcoin, for instance.
Who is the author? Jacob Goldstein is the host of a well-known podcast Planet Money, and an established writer and journalist. He previously worked for the Wall Street Journal, but there his area of focus was mostly on health and medicine. Thus, a true eclectic, he seems to have been successful in discussing these cutting-edge financial matters in fundamentally non-technical ways.
The book’s 16 chapters fall into five parts, taking us all the way from the origin of money until today, as well as with educated speculations about the future.
The first part of the book focusses on how money was invented, first various sorts of objects, such as clay, stones, even cattle, and then coins, invented by the Hydans of ancient Greece. It was all about coping with specialization stemming from trade. But coins were heavy, and at times cumbersome to handle. With the invention of paper as well as of printing, paper money emerged. China was the first. Governments shifted towards collecting taxes in coins and money. While money was initially based on tributes, i.e., backed up by physical assets held in typically tribal societies, markets and modern money stimulated not only the development of cities, but also prompted economic growth in general.
Nevertheless, China’s use of money came to an end with the Mongolian invasions.
It was not until the 1600s that money reappeared, now in Europe. Goldsmiths took deposits from clients, which were then lent out to others. As money reemerged, so did the development of banks, the way we have come to know them today. The book’s second part discusses this early advancement of capitalism, again largely driven by how the concept of money took form. The UK was in the lead, but money was not standardized. Each bank, large or small, issued their own funds. It was all a mess. It was the French, during the reign of the Duke of Orleans, who came up with a unified concept of money through the establishment of the forerunner of a central bank. This entity had various monopolies, including on trade with the West Indies, and was thus able to back up the paper money it issued with these real assets.
This evolution gradually led to the concept of money we know today. Though each bank would still issue its own money. In the US, for instance, there were several thousand different currencies. Gradually this evolved into state-based currencies, perhaps quite similar to the situation we had in Europe with many independent national currencies before the advent of the Euro.
Gradually, a single currency emerged, the dollar, being linked to gold, one ounce of gold equated to $20.67. Whenever there was economic uncertainty, citizens would typically wish to exchange their paper money for gold. Banks would customarily not be able to meet all such demands, and an economic crisis would emerge.
A way that was latched onto by the then central banks to cope with this, was to raise interest rates and to limit the free flow of money. Yet this led to a further worsening of the economic crises, such as accentuating the financial calamities of 1929 and the Great Depression. Walter Bagehot’s advice was never adhered to, “Lend freely into a panic” (Me. Bagehot was the famous editor of The Economist in the 1870s). Perhaps the main reason for the reluctance to increasing the amount of money in the free flow might be a fear of not having large enough gold deposits in the banks to be able to pay gold to the public that was called for.
Gradually however, a modern concept of money emerged, initially still linked to gold (the gold standard). This evolution was driven by a combination of financial crises, major political shifts, and some new technology. We saw the progression from paper money backed by gold, to paper money backed by nothing, to today’s numbers on a computer! But before we get to this latter evolutionary stage, let us first spend some more time on modern money, the fourth section of the book. A central theme here was the combined backing of the gold standard, typically spearheaded by central banks. Again, a central event was the crisis that began in 1929. Central banks did not increase the flow of money, and raised interest rates, both factors being devastating. Important empirical work by Friedman and Schwartz, more than any others, has manifested the disastrous negative effects from these fallacies. Modern economists such as Fischer and Keynes were critical to maintaining the gold standard. The gold standard locked countries in a terrible economic cycle. However, the gold standard was nothing more than the choice people had made. So gradually the gold standard was abandoned.
The final section of the book deals with what seem to be some of the major monetary issues that have been at the center of attention after the gold standard was abandoned. The emergence of banks which spearheaded transactions in bonds that were largely stemming from real estate assets was central here. When the value of such bonds diminished, often becoming worthless, we saw the financial crisis of 2008. Financial institutions such as Bear Stearns and Lehman Brothers went into bankruptcy. In the end, massive infusions of funds from the Federal Reserve saved the day.
Yet this sparked the emergence of the Euro. A single currency was created for 12 countries, with vastly different economies. Admittedly there were limits imposed on what any country might go into the red in a given year – a 2% budget deficit was all that was allowed. But some countries, notably Greece and Portugal, were unable to live with this. The European Central Bank had to “bail out” these nations. This, in the end, was indeed a successful operation. Mr. Draghi, the then head of the European Central Bank made a promise that people generally believed, namely that the ECB would do “whatever it takes” to save the Euro. Such statements hold water only when they are widely believed, however, which was indeed the case.
The radical dream of digital cash became more and more accumulated, however. The era of the Bitcoin had emerged! The emergence of vast improvements in the speed of communication and in computing power separated two parallel developments when it came to creating digital currency. Giant corporations would spend millions of dollars to create proprietary digital cash, spurred by such giants as Citicorp, but individuals would also work on this challenge, for free. In the end, the latter group came out ahead. The early forerunner to Bitcoin was DigiCash, which went bankrupt in 1997. Bitcoin was developed (including others) by Satoshi Nahamoto, a fake name; we simply do not know who the individual(s) is (are) behind this name! The key was to come up with a ledger maintained by everyone.
There seem to be five salient features with Bitcoin:
- Every new transaction gets maintained by everyone.
- All computers in the network record a given transaction at the same time.
- The first computer to be able to acknowledge a given transaction, acknowledges this
on the ledger, as a block.
- All computers check that the ledger is correct.
- Each block is linked to the blocks that came before, i.e., “chains of blocks”. This
cannot be changed or manipulated.
Is Bitcoin safe? And are they facilitating illegal practices such as paying for drugs? While there are undoubtedly examples of this, there are naturally also many legitimate uses. Payments and deposits can generally be done more easily, and without the influence of “big brother”, i.e., central banks.
Where does this now leave us? What about the future of money? The author speculates that there might be three major developments:
The first would be a world without cash. We already see how payment of various sorts may be taking over the use of cash. Countries such as Sweden and Norway are in the lead here. Paper money of large denotations, above all, may be eliminated. Small transactions may still be conducted through cash coins or paper money. The possibilities for criminal actions may be decreased, and transactional expenses may be dramatically decreasing.
A world without banks may also be coming. There may instead be a full-reserve bank which backs up loans and facilitate money deposits and payments. Cash would be provided, as needed, through cash machines (ATMs) and mutual funds would take over the rest.
This brings us to what might perhaps be an ultimate evolutionary stage, namely that money is freely printed to anyone who may want a job. Why should governments need to tax citizens, so as to spend money? Why not simply print it as needed? This is Modern Monetary Theory. This might perhaps not be as far off as we might think!
After reading this book I am left with a fundamental question. Did I gain clarity when it comes to where we may be going? Particularly, are Bitcoin and Blockchain becoming understandable? I must confess that my answer to the above is tentative. On the one hand, there is no doubt that the evolutionary path that money has followed has shed light on where we may be when it comes to decentralized encrypted digital currencies. The present book is certainly very useful when it comes to this, providing insightful but also entertaining evolutionary paths. On the other hand, the phenomenon of encrypted currencies remains somewhat foggy for me. This reviewer might need additional explanations! This being said, I nevertheless recommend this book. There are undoubtedly many valuable additional insights that I have come away with.
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