Currency and latency

Public Domain Image: F.S. Church, published in Harper’s Weekly, January 17, 1874, p. 61.

It is generally understood that the idea of currency goes back roughly 3,000 years. While many of us think of metal coins and paper money when we think about currency, the earliest commodities of traded value were not minted or printed. Step back for a moment. Why did we invent money in the first place?

Well, the general theory is that we developed money as a transferrable unit of value because barter breaks down if someone with something to trade can not trade with someone who does not need what that person has to offer. Currency was once based on scarcity, or difficulty in gathering. Salt, used by the Mayan civilization roughly 2,500 years ago, was based on the fact that salt is not evenly distributed throughout the world. The same goes for early American cotton fabric, cocoa beans and later, bronze, copper, silver and gold minted coins.

For hundreds of years, systems of currency were based on a commodity, even when they were not made from that commodity. However, governments started to move away from this practice starting about 1000 A.D. with China.

Here in the United States, the U.S. Dollar was based on the gold standard until August 1971 when then President Richard Nixon made an announcement on prime-time television. This new uncoupled currency is called Fiat money.

A commodity based system of trade value is troublesome because the value changes from day-to-day. If you shave off a piece of a gold coin, you get two pieces you need to keep track of and few people will have the means to reassemble the coin later. So, we decided that, to be practical, the coin itself would become the holder of the value, rather than the materials it was made from. This brings us to an interesting problem; in the U.S. coins cost more to make than they are worth. To contrast, the paper money is a lot cheaper. These numbers do not even take into account the costs of keeping physical money in circulation. Yes, it costs money to keep coins and paper money in circulation.

For many people around the world physical money too is becoming obsolete. First it was checks, then bank and credit cards replaced many people’s transactions. These became much faster and more convenient because you need not carry around bills or coins, and as long as you had the credit or money in your bank account, you could purchase what you needed or wanted.

You might wonder, isn’t credit a new thing? It is older than you might believe. Credit cards are relatively new, but credit, the lending of money, is even older than the institution of banking itself. Banking has been the backbone of economics for many years now but over the last several years that has been changing. Banks no longer make the money they used to on consumer lending and investing, however due to the pandemic, banks are changing even faster.

If you read about investing, you have likely heard about a new thing called cryptocurrency (such as Bitcoin and Dogecoin) which is a completely digital currency based on a blockchain. A blockchain is a series of mathematical computations generated by a computer first proposed in 1998.

What should be noted regarding cryptocurrencies is that, with the huge amounts of energy consumed by computers that generate the blockchains, the practice is as wasteful as minting coins that cost more than they are worth. There is a significant ecological cost to the practice when fossil fuels are employed to power this practice, but even with the many computer farms powered off of renewable energy, that is renewable energy that might be used for more practical means.

The fast growth of digital currencies has spurred interest in state-run digital currencies, otherwise known as CBDC. Writers for The Economist report that up until now, most investors have shrugged off cryptocurrencies, however cryptocurrencies, like gold, are built on a belief of its value so as long as investors and governments keep investing in them, even without expressly supporting the concept of digital money, will encourage its growth.

Even though money is changing, it will not be going away anytime soon. However, how people get money may be changing as well. China and other countries are experimenting with digital allowances given to citizens on bank cards which can be redeemed for food, housing and other essentials. These programs are very new and very controversial by people who are concerned about personal privacy and direct government control of citizens. While these concerns are valid, they do not reflect the fact that any society which provides safety net programs, like Social Security Disability Insurance, already have much of the same power.

The old axiom, “money makes the world go ‘round” is true because we have built up so much around money that it would be difficult to move away from it. We may need to in the future, but just like those who exchanged cocoa beans for cloth not likely being able to predict multi-national banks, I cannot predict the world we will reside in sometime in the future.

I would normally say that this article is my two cents worth, but the time it took me to write, the electricity consumed by my computer, my education prior to me writing this article, and the cost of the website or email on which you are reading this article cost far more than two cents, and I see absolutely none of it. I can only hope that reading this was worth your time in other ways.