We are in an exciting age where new and varied media of exchange are constantly being developed and promoted. These changes are important and could potentially “erode” national monetary prerogatives. In the very near future, for example, private multinational organizations might issue new media of exchange which recognize each other’s monetary values.
For example, something similar to an Apple iTunes card, but expressly denominated in Apple’s own monetary unit, might be used more widely to pay for concert tickets, clothing items, or telephone charges generated by other companies. That said, the credibility of the commercial organizations involved would be subject to intense scrutiny, and any monetary failure or oversight could endanger the company’s entire operations and earnings potential. Indeed, the price of “getting money wrong” could be disastrous to any business, even to the world’s largest joint-stock company!
Moreover, nation states are unlikely to yield their exclusive seigniorage rights to large multinational corporations without a struggle. As a basic premise, the more a nation, state, or municipality sanctions the use of multiple currencies, the greater the overall transaction costs become for all citizens and parties. Governments all around the world, however, seem to have taken a remarkably soft stance on digital monies presumably as they seek to nurture and encourage national or regional advances in e-commerce or “fintech” IT finance. That notwithstanding, it is clearly in the political interests of any state (for purposes of tax collection and monetary stability) to have all forms of money integrated and denominated in its own abstract money of account – that is to say, in its own national currency or legal tender.
Digital Versus “Real” Monies
Perhaps the advent of cryptocurrencies and digital monies presents the greatest of challenges to a clear understanding in our Numismatist’s Guide to Money series. What are cryptocurrencies, cyber-currencies, digital monies, e-money, and virtual monies, and how are they different from older and contemporary forms of currencies or monies?
First of all, there are fundamental problems with the terminology – or loose jargon – used to describe these emerging technologies. References to “virtual” or “imaginary” monies imply that they are alternate to “real” or “non-imagined” tangible monies, presumably in the physical form of banknotes and coins (but not as tangibly-challenged bank cheques, bills of exchange, or other credit instruments). And yet, the greater part of today’s (or even yesterday’s) money consists of “book money” or digitized bank balances supported by complex, high-security, software platforms.
Differentiating between monies in terms of their “realness” or physicality is, at best, unhelpful. Broad, catch-all terms like digital monies, cyber-currencies, and e-money are, in fact, increasingly being defined as encoded “proof of work” cryptocurrencies that require a “verifiable demonstration that they have paid a cost in computation time” without disclosing the identities of the agents involved. These cryptocurrencies exist as measurable stocks of digital deposits and are every bit as physical as money displayed in a modern bank balance, the reality of which goes largely unquestioned.
These cryptocurrencies require continual, transformational inputs of software, hardware, and labour to be maintained, consuming tremendous amounts of electrical energy (on a scale that rivals that of national economies), and the three classic Ricardian factors of production (land, labour, and capital) posited by orthodox economic theory. So as Dennis O. Flynn puts it: “Digital monies are tangible, not virtual”. That is, digital monies exist in a certain physical contexts owing to all the resources they require and consume. But, can these digital deposits really be thought of as viable currencies?
Cryptocurrencies For Algernon
On the most profound level, we have to consider the “moneyness” of digital monies. In which ways, and to what extent can new cryptocurrencies be thought of as being “money”? In an uncertain age of global pandemics and emerging socioeconomic crises, two common misunderstandings deserve immediate consideration.
Foremost is the assumption that cashless transactions are somehow “moneyless”. Although it may not always be readily apparent, new payment methods always require transactions to be settled in an abstract unit of account. The recent popularity of a plethora of new, pre-paid IC cards (ICC), the growing usage of QR codes, and more conventional post-pay credit cards and debit cards, allow for cashless transactions to be made conveniently without physically exchanging legal tender currency.
Nonetheless, sophisticated monetary transfers are always required to enable and settle these transactions. The increasing usage of “smart” IC “chip” cards is not causing the “death” of money, but it is radically changing how it is used, and dramatically reducing the amount of banknotes and coins needed in general circulation (I hope to talk more about the growing move towards “cashlessness” in CoinsWeekly soon).
In addition to the notion that “cashless transactions are moneyless”, there is a growing belief in future, denationalized “digital” money which itself emerges from a second, widely-held misunderstanding that “money is primarily a medium of exchange”. Classical political economy, neoclassical economics, and neoliberalist “new monetary economics” have all, to some extent, implicitly encouraged this perception, although in reality a sound social and political base is needed to allow money to function as a measure of value or unit of account.
Moreover, misunderstanding the nature of monies allows some to suggest that new forms of currency might replace our present-day monies, just as paper monies were able to “take on a life of their own” and delink from their gold and silver bases. Once again, these ideas spring from a preoccupation with money’s performative function as a medium of exchange in economic transactions, and ignore the underlying social and political relations that exist between its issuers and users.
Superficially, cryptocurrencies claim to share monetary characteristics universal to cowrie shells and precious metal coins of gold, silver, and copper. In reality, however, established cryptocurrencies like BlackCoin, Darkcoin, PotCoin, InsaneCoin, Titcoin, TrumpCoin, JesusCoin, and so on seem to be designed with specific online uses in mind, and their utility is often limited to a particular online market or even to one website. The use and circulation of any monies, be they sixteenth-century bills of exchange or today’s bitcoins, remains embedded in, and restricted to, the economic network it was created for. These “market monies” lose their value (as currencies) if the viability of their market networks is compromised.
Anonymous, unregulated, decentralized, and denationalized digital monies might become a viable transmission mechanism (especially for illegal activities, such as those involving pornography, prostitution, slavery, drugs, forgeries, arms, and money laundering) providing they can “bridge” between demand and supply currencies. In order to be effective as media of exchange these cryptocurrencies will presumably peg their exchange values to well-managed, key national currencies.
Nevertheless, these new payment mechanisms will have to confront unending political, and hence legal, opposition from national and international monetary authorities should they be considered a problem –or a threat – to present-day systems.
Towards a New Understanding
With an informed understanding of what constitutes money – of what currencies and monies are really doing – we can see that much of the excitement and hyperbole surrounding “revolutionary” cryptocurrencies is misplaced. Typically, the exchange value of cryptocurrencies, as measured in terms of effectively managed, national currencies is characterized as being “highly volatile”. The ability of unregulated cryptocurrencies to function as socio-economic stores of value is thus brought into question. And cryptocurrencies are plagued by slow transaction times, especially in comparison to those of conventional credit cards, like VISA or MasterCard.
Moreover, any technological advantages that might be conferred by using cryptocurrencies as media of exchange need to be weighed against their inherent inability to function as centrally regulated measures of value across wider socio-economic communities. The digital deposits of cryptocurrencies may arguably be symbols of real status and wealth, but they are yet to be accepted as integral components of the manufactured system of competing social and political relations interests that we associate with monetary systems. Cryptocurrencies, and more broadly digital monies, thus currently lack the community-based, political resources and “infrastructural powers” that national currencies typically provide.
In the final analysis then, cryptocurrencies and digital monies are media of exchange, and not much more. Their oft-noted conceptual likeness to other commodities stems from just this fact! That is, cryptocurrencies are new types of [digital] monies in the limited sense that they may be used in the settlement of transactions.
Perhaps, the functions that we have traditionally proscribed as money: a means of exchange; a store of value; and a measure of value; may be judged by the general public to be arcane, academic, and overly theoretical. Digital monies, and their earlier electronic forerunners, have been used for years (and decades), almost all the time erroneously referred to by all parties as “money” despite falling a long way short of the intellectual constructs discussed above. The argument suggests that our definition of what constitutes as currencies or monies has to be softened – or “dumb downed” – to reflect the new and changing realities of the twenty-first century.
Blockchain and Monies Beyond
Cryptocurrencies and digital monies may well have limited futures as media of exchange, but serendipitously the most innovative elements of present-day cryptocurrencies, such as the “distributed ledger” or “blockchain” technologies, could change the way in which all future electronic transactions are settled.
For example, the distributed ledger, a prototypical “virtual clearinghouse” and decentralized asset register, will likely be adapted for use in new monetary technologies providing it can accommodate and facilitate huge volumes in trade. An emerging consensus between central bankers on what is essentially a new digital accounting mechanism is hardly likely to make headlines in the way that cool, futuristic cryptocurrencies have. Nevertheless, the authority to designate and validate monetary claims is the key prerogative of central banks in modern economies.
Recognition that the power of money thus lies in the promise, the belief, and trust that exists between the issuers and the users of money, as the foundation of monetary transactions, reveals that peer to peer “proof of work” cryptocurrencies have the potential to provide almost universal access to immediate settlements, with lower transactional costs, increased security, and arguably with greater personal freedom, control, and transparency. Indeed, technology associated with cryptocurrencies might turn out to be much more than exciting financial innovations, they may themselves become a key part of the economy-building infrastructure which will define our monetary progress in the twenty-first century.
Author’s note: The thoughts presented in the Numismatist’s Guide to Money series are based on my earlier “Conceptualizing Money: from Commodity Monies to Cryptocurrencies” (2017) article, with thanks to the editors, publishers. And anonymous reviewers. Please see the bibliography with additional, and suggested, readings below.
Sources and Additional Readings
- W. Bain, The Corner in Gold: Its History and Theory, (New York: Greenwood Press, 1968 ).
- Barrdear and M. Kumhof, “The macroeconomics of central bank issued digital economies”, Staff Working Paper No.605, (London: Bank of England, 2016).
- Bryan, The Gold Standard at the Turn of the Twentieth Century: Rising Powers, Global Money, and the Age of Empire, (New York: Columbia University Press, 2010).
- Broadbent, “Central Banks and Digital Currencies”, [speech] (London: Bank of England, 2016).
- J. Bytheway, Investing Japan: Foreign Capital, Monetary Standards, and Economic Development, 1859–2011, (Cambridge, MA: Harvard University Asia Center, 2014).
- J. Bytheway and M. Metzler, Central Banking and Gold: How Tokyo, London, and New York Shaped the Modern World, (Ithaca: Cornell University Press, 2016).
- J. Bytheway, “Conceptualizing Money: from Commodity Monies to Cryptocurrencies”, in T. Sato and K. Yamakura (eds.), Kinyu to keizai: riron, shiso, gendaikadai [Finance and Economics: theory, thought, present challenges], (Tokyo: Hakuto, 2017), pp.65-75.
- Crowther, An Outline of Money, (London: Thomas Nelson and Sons, 1940).
- P. Droit (ed.), What is the Meaning of Money?, (Boulder: Social Science Monographs, 1998).
- Elvin, “Preface: some thoughts on the nature of money”, in Jane Kate Leonard and Ulrich Theobald (eds.), Money in Asia (1200-1900): Small Currencies in Social and Political Contexts, (Leiden: Brill, 2015), pp. ix-xxxix.
- O. Flynn, Follow the Monies: Global History and the Laws of Supplies and Demands, forthcoming publication, delivered as presentation at DAMIN-SF (17 May 2016).
- O. Flynn, “Six monetary functions over five millennia: A price theory of monies”, in R. J. van der Spek and Bas van Leeuwen (eds.), Money, Currency and Crisis: In Search of Trust, 2000 BC to AD 2000, (London: Routledge, 2018), pp.13-35.
- K. Galbraith, Money: Whence It Came, Where It Went, (London: Andre Deutsch, 1975).
- K. Galbraith, The Age of Uncertainty, (London: Andre Deutsch, 1977).
- R. Hicks, A Theory of Economic History, (Oxford: Oxford University Press, 1969).
- Ingham, The Nature of Money, (Cambridge UK: Polity, 2004).
- Ingham (ed.), Concepts of Money, (Cheltenham UK: Edward Elgar, 2005).
- Iwamoto [translation by S. J. Bytheway] “Yanagita Kunio and the problems of agricultural markets”, in C. Nartsupha and C. Baker (eds.), In the Light of History: Essays in Honor of Yoshiteru Iwamoto, Eiichi Hizen, and Akira Nozaki, (Bangkok: Sangsan, 2015), pp. 61-70.
- Mitchell-Innes, “What is Money?”, in Banking Law Journal, vol. 30, (May 1913), pp. 377-408.
- Mitchell-Innes, “The Credit Theory of Money”, in Banking Law Journal, vol. 31, (January 1914), pp. 151-68.
- Mitchell- Innes, “The Credit Theory of Money”, in Geoffrey Ingham (ed.), Concepts of Money, (Cheltenham UK: Edward Elgar, 2005 ), pp. 354-74.
- P. Jones, The Money Story, (Newton Abbot: David & Charles, 1972).
- M. Keynes, “What is Money?” [Review Article], in Economic Journal, vol. 25, no.95, (Sept. 1914), pp. 419-21.
- M. Keynes, A Tract on Monetary Reform, (London: Macmillan, 1923).
- T. Llewellyn (ed.), Reflections on Money, (London: Macmillan, 1989).
- Marx, Capital, Volume One, (London: Wordsworth, 2013).
- Metzler, Capital as Will and Imagination: Schumpeter’s Guide to the Postwar Japanese Miracle, (Ithaca: Cornell University Press, 2013).
- Ricardo (P. Scraffa ed.), The Works and Correspondence of David Ricardo, Volume One, (Cambridge: Cambridge University Press, 1951).
- H. Rogers, America Weighs Her Gold, (New Haven: Yale University Press, 1931).
- Schumpeter, Theory of Economic Development, (Oxford: Oxford University Press, 1934).
- Skidelsky, John Maynard Keynes, 1883-1946: Economist, Philosopher, Statesman, (London: Macmillan, 2003).
- F. Spalding, A Key to Money and Banking, (London: Blackie and Sons, 1938).
- Vigna and M. J. Casey, The Age of Cryptocurrency: How Bitcoin and Digital Money are Challenging the Global Economic Order, (New York: St. Martin’s Press, 2015).
- Williams (ed.), Money: a History, (London: BM Press, 1997).
- Randall Wray, “From the State Theory of Money to Modern Money Theory: An Alternative to Economic Orthodoxy”, Working Paper No.792, (New York: Levy Economics Institute, 2014).
This is the final article in the Numismatist’s Guide to Money series, where Simon Bytheway has been presenting a new guide to understanding cryptocurrencies, digital monies, and varied media of exchange to find out what they tell us about competing national and regional currencies, and the wider socio-economic meaning of money in our pandemic-challenged world.
If you missed the previous parts of this series, here you can read part 1: What Does Money Do? Here is part 2: Theories of Money, and part 3: the Origins of Money, as well as part 4: Mitchell-Innes and the Credit Theory of Money.
For more information on the author, read Simon Bytheway’s Who’s who entry.