Platt Perspective on Business and Technology

Considering the nature and qualities of money 1: standard nationally-based and virtual money 1

Posted in macroeconomics by Timothy Platt on January 5, 2014

I have been following the bitcoin news story for a couple of years now and have been planning for almost as long as that to address it here in this blog. And I begin to do so starting with this posting.

For background, bitcoin was the first publically developed peer-to-peer electronic money, set up for use in a private sector networked payment system.

Bitcoin, I add, is also commonly referred to as a form of digital money, or virtual money. But however it is categorically identified it was originally conceived in 2008, at least as a matter of public record, and developed under a pseudonym by a “Satoshi Nakamoto”. And much of the original encryption and other software behind it was originally developed under that name too. Though as of this writing at least, there is uncertainty as to whether bitcoin is the product of one individual or of a group of developers, with perhaps some members more actively involved than others. I add in that context that a group of mathematicians published collaboratively in the 1930’s under the single pseudonym: Nicolas Bourbaki, and when their identities became known they came to be known as the Bourbaki Group. So there is precedent for that type of single pseudonym group collaboration if that is what is involved here.

Setting aside the issues of who created bitcoin, it was initially publically launched in 2009 and it quickly came to general public awareness and interest (see this history of bitcoin for further background details on that.) For purposes of this posting I will add only one more historical detail, at least here. The bitcoin phenomenon was picked up upon early on by two wealthy investors who had previously brought themselves to public attention through their unsuccessful court challenges as to the founding and ownership of Facebook: Cameron and Tyler Winklevoss. As venture capitalists, they led the first seeding round to financially back a bitcoin payment processor venture: BitInstant. And at least as of April, 2013 they claimed to personally hold some 1% of all bitcoin currency at least then in existence. I raise this detail here because their marketing of bitcoin in pursuit of their own business and investment interests have, for many people, wrapped their own names and reputations around those of bitcoin per se. That might or might not be good for bitcoin, but I leave that to a separate discussion.

I do not know how many direct alternatives to bitcoin are out there, but as of this writing there are over 60 cryptocurrencies like it that are publically traded (see a partial listing of them here.) So bitcoin can be seen, and certainly as of now in the early days of 2014 as a more public face of a developing new economic systems phenomenon.

But I do not write this with a primary goal of discussing bitcoin per se, or its volatile valuation history when that is putatively measured against more standard, nationally based currencies and monetary systems. My goal here is to at least begin a discussion as to what “money” means, where that is being reshaped by bitcoin and its currency-alternative peers. So I switch directions here to very selectively discuss the history of money and I begin with what I would present as a working definition:

• Money is a quantifiably scaled system for determining the relative values of otherwise disparate goods and services across a marketplace.

Money is an abstraction. But for most of the history of money it has been operationally viewed as a system for comparing and establishing the valuation of any marketable goods or services against the specific valuation of some single legally established standard commodity. Gold has frequently been used as the physical standard that monetary valuation rests upon, and many currencies have set their value according to a gold standard, with governments issuing their money and backing its value with their gold reserves. But gold is only one of many commodities that have been used as bases for establishing the value of money in circulation. The Wikipedia piece on money also cites silver, copper, rice, salt, and even peppercorns, large stones, decorated belts, shells, alcohol, cigarettes, cannabis and candy. That, historically and across the sweep of cultures that have employed money, is still only a partial list of currency-standardizing and backing commodities that have been used.

• But however many more currency-backing commodities might be named here that have at least occasionally been used as bases for setting monetary value, when a physical commodity is used to back a currency, in effect the valuation of all else is set in terms of their relative value to the set value of this one commodity in use for this purpose.

Money is an abstraction. And that became overtly true when nations such as the United States moved off of a gold or other baseline commodity standard, and began to back their money issued entirely with their “full faith and credit” – switching from a representational money standard to a fiat money standard to cite the formal terminology for this. Under those conditions, a nation’s money’s valuation is determined not on the basis of any one type of transaction, but rather on the relative aggregate strength of its entire national economy and the entire system of monetized transactions that it sustains – with relative here, a measure of how national economies stand in comparison to each other.

I am going to continue this discussion in a next series installment where I will at least briefly and selectively consider electronic funds transfers and other mechanisms where monetary value has become digital and virtual, and even for the most solidly backed nationally based currencies – making them substantially electronic currencies too. And after that I will discuss how bitcoin and its peers are and are not like more conventional money and what those differences mean, and how the very concept of what money means is changing. In anticipation of that, I note here that the peer-to-peer nature of these new currencies is the crucial determining factor there. And I will also discuss money in more abstract terms and as information per se. Meanwhile, you can find this and related postings at Macroeconomics and Business.

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