The following transcript was taken from one of Kelly’s live classes for tax professionals.
What is money and how would we recognize it? Is bitcoin money? This is one of my heroes, Andreas Antonopoulos. He is a developer who started working on bitcoin early on. He’s one of the few guys that didn’t hoard bitcoin during that time as he was more interested in the technology, so he’s oftentimes given a hard time by other developers for not being a multimillionaire. He’s written lots of books and he gives presentations. I’m hoping someday to have him talk at lifewithcrypto.com.
He says “currency is a language that allows us to express transactional value between people. It is older than the wheel and possibly as old as fire”.
Money started out as a perishable commodity. Everybody had to agree that this particular commodity, whatever it was, had value, and if it had value, then people could trade it for other goods. In Africa and China they used seashells. In Fiji they used whale’s teeth.
All those perishable commodities had five characteristics in common:
• they were scarce
• they were recognizable
• they were divisible
• they were fungible (you could substitute one piece for another)
• and they were portable.
The one thing that they didn’t have is that they weren’t very durable. Many of them were destroyed by natural disasters, which caused economic turmoil and hardship at different times throughout our history. In came commodity coins.
Commodity coins started to be found in archaeological records about 800 B.C. They were mostly made of gold and silver and oftentimes bronze. They were made popular during the Roman Empire, which started around 211 B.C. For about 500 years they were the most trusted form of money, often called the “most trusted unit of account”. These commodity coins had the same five common characteristics: they were scarce, recognizable, divisible, fungible, portable and now they were also durable.
more info at https://www.ancientgoldcoins.com/ancient-coin-timeline
So, what was the problem with ancient commodity metal coins?
• They were controlled by greedy kings and dynasties
• they were debased during minting, (does that sound familiar?)
• they were heavy in large quantities, which made them less portable.
Fun fact: money got its name from the Roman goddess Moneta, whose temple housed Rome’s mint for at least 400 out of the 500 years. We can thank her for money. They even had coins with her name on it.
more info at http://numismatics.org/rome-a-thousand-years-of-monetary-history
Eventually metal coins gave way to paper notes. Paper notes replaced coins about 800 A.D. during China’s Tang Dynasty.
Fun fact: paper was invented in China, so it makes sense that China was the first to invent paper money.
Paper notes, also known as banknotes, were a promise to pay the amount written on the paper note in gold or silver coins to whoever was holding the note, and those banknotes first appeared in Europe around 1661. It was around the Netherlands, and they became very popular very fast. You can see why, but back then a banker was like a businessman. It wasn’t the Fed and wasn’t the government. You put your gold and silver probably with a gold or silversmith and he gave you a paper note that said if you need to redeem those, come back and do so.
more info: www.silk-road.com/artl/papermoney.shtml
Banknotes had the six common characteristics of money plus one more. They were scarce, recognizable, divisible, fungible, portable, durable (as long as you kept them away from fire) and now there’s a new characteristic: trust. This trust was between you and the person who is holding your coins. We’ll call him a “banker”, but a different kind of banker than what we know of today.
Notes were very popular. In the United States in 1900, only about 300 years later, the US adopted a gold standard where US paper dollars could be swapped out for gold.
In 1913 the Federal Reserve was created to manage the money supply. That’s a whole class in and of itself. How many of you understand that the Federal Reserve is a corporation? You need to know this. Our money is managed by a corporation. What I want to know is why is it that this is a corporation that doesn’t have to have the word “Corporation” in its name? If I create a corporation, I’m required to put that in my name somewhere, hence the name Sunshawl Services Inc.
In 1934 the US Gold Reserve Act was created which partially disconnected the US dollar from gold. In 1945 the US became the world’s reserve currency while it was still partially on the gold standard. In 1971 President Nixon disconnected the dollar completely from the gold standard. Why did he do that? The rest of the world was starting to hoard US dollar notes because they were a good investment, and for some reason, I don’t know all the history super well, they wanted to start redeeming them for gold. Nixon was very concerned that there was going to be a run on our gold. So, he completely disconnected the dollar from the gold standard so that other countries couldn’t come and end up swapping out their paper dollars for something more valuable, called gold.
For the first time in US history, money was not backed by any kind of valuable commodity, that was in 1971. Paper money was backed solely by the full faith and credit of the US government. Trust now shifted away from individuals to government and the Federal Reserve.
What exactly is “Fiat” money? Fiat money is currency which derives its value from government regulation or law. The dictionary says paper fiat money is “inconvertible paper money made legal tender by government decree”. Inconvertible means not convertible, such as paper money not exchangeable for gold or silver. Our US dollars are inconvertible fiat money, which means it can no longer be converted into commodities such as gold or silver, like when it was originally created.
Fun fact: the oldest currency in the world is the British Pound Sterling, and it was issued in 1696 about 30 years after the first one showed up in the Netherlands.
Modern “Fiat” money is not paper, it is digital. The Federal Reserve banks around the world create digital money through quantitative easing and fractional reserve banking. That’s a whole class we can do on what those two words mean. Look them up on Google if you want to know more. The modern monetary system now relies on the solvency of banks and the ability of debtors to repay their debt. Those debtors could be borrowers like you and me, it could be corporations, it could be the government. So, trust now has expanded to include the entire financial system, not just between people.
In 2008 the trust in our modern financial system was pushed to the edge of a cliff. Shady bank practices led to the worst economic disaster since the Great Depression. The crisis caused $16 trillion in wealth to vanish literally overnight. Banks foreclosed on more than 1 million homes and over two and a half million people lost their jobs. I’m so grateful that towards the end of that crisis I sold my house before the market completely fell out from under me in the Eugene area. If I’d waited just a few months longer I would have been underwater. So, it could have affected my world, luckily it didn’t.
Does modern digital money maintain all seven characteristics of money?
It’s still recognizable, divisible, fungible, portable and durable (as long as you keep it away from fire).
Is it scarce? Well, if it’s digital, we don’t even care about fire anymore. And, I say it’s not so scarce anymore with quantitative easing and fractional reserve banking.
Is it trustworthy? With a 1930s market crash and all the stuff that happened in the 70s, 80s, and 90s and the financial crash in 2008, I’m saying it’s not so trustworthy anymore.
Audience: “Are there more issues with digital money”?
Speaker: I’m assuming you mean because computers can crash? Well, why is that not really an issue with digital fiat money?
Where does the money live? It’s in the cloud. Is modern digital money actually anything? Or is it just ones and zeros on a computer screen? Who keeps track of the ledger that says, “I have so much money in the bank, or I have so much debt”? Who keeps track of those ledgers right now? The banks. Even if it was on an exchange, if it’s US dollars, there is a bank in the background somewhere that is keeping track of that digital ledger that says “I got a thousand dollars in the bank and you got five hundred dollars in debt. If I sell you something, I send you money, it’s going to debit my account and credit yours”. It’s all kept track of by a central authority, commonly called the “bank” at this point in time. The only problem I’ve heard with banks is them needing to be bailed out. I’ve never heard of a banker complaining that he doesn’t have a paycheck.