Cryptocurrency Is an Inevitable Step in the Evolution/Degradation of Money

Why do governments debase their currency?

Cryptocurrency Is an Inevitable Step in the Evolution/Degradation of Money

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Before talking about cryptocurrency we need to define first what money is, where did it come from and why it is needed.
Wikipedia defines money as
"... any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The main functions of money are distinguished as: a medium of exchange, a unit of account, a store of value and sometimes, a standard of deferred payment.

Money was historically an emergent market phenomenon that possess intrinsic value as a commodity; nearly all contemporary money systems are based on unbacked fiat money without use value. Its value is consequently derived by social convention, having been declared by a government… to be legal tender; that is, it must be accepted as a form of payment within the boundaries of the country, for "all debts, public and private"… . Contexts which erode public confidence, such as the circulation of counterfeit money or domestic hyperinflation, can cause good money to lose its value.

The money supply of a country comprises all currency in circulation (banknotes and coins currently issued) and… one or more types of bank money (the balances held in checking, saving… and other types of bank accounts). Bank money, whose value exists on the books of financial institutions and can be converted into physical notes or used for cashless payment, forms by far the largest part of broad money in developed countries.”

Sorry for the long quote, but every word in it is worth it. It is the base for understanding.

So, the most important functions of money are basically clear and need almost no explanation:
- a medium of exchange. A medium of exchange has to be divisible, easily and securely storable, transportable and widely accepted for payment for goods and services.
- a unit of account. A unit of account has to be stable in real value over time for correct accountancy.
- a store of value. A medium of store of value has to be able to retain its intrinsic value for a long while and hard to counterfeit.
- and sometimes, a standard of deferred payment. A medium of standard of deferred payment just like a medium of store of value has to retain its purchasing power in time.

Any item or verifiable record that fulfills these functions can be considered as money.


Part 1. Evolution of Money: from Reality to Virtuality

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Historically, the evolution of money has begun around 3000 BC from Commodity Money which had absolute intrinsic value by itself (barely, wine, salt, peppercorn, gold).

Along with Commodity Money the first Representative Money began to be used in the ancient empires of Egypt, Babylon, India and China since commodity warehouses issued certificates of deposit as evidence of a claim upon a portion of the goods stored in the warehouses. Those certificates of deposits marked the beginning of paper money and then evolution of money moved towards size minimization, convenience in long-term storage, exchange, transportation and virtuality while losing its intrinsic value.
For example, your bank money exists only virtually inside the bank computers as the electronic records. We pay for the goods and services by our credit cards and Americans call that "cash". It is not cash. If 200-300 bank customers decide to withdraw $1000 each of real cash from their accounts, I think they will be asked to come back in a few days.

Lydians which used to live in the West of present Turkey began to mint first coins from gold and silver around 600 BC and that was the time when individual counterfeiters had to appear. It is understandable, but along with them the rulers of different countries started debasing their own money. For example, the government of ancient Rome reduced the purity of their silver denarius from 95-98% in 1st century AD to 5% purity by 3rd century AD.
A nice answer I found was:
"One reason a government will debase its currency is financial gain for the sovereign at the expense of citizens. By reducing the silver or gold content of a coin, a government can make more coins out of a given amount of specie. Inflation follows, allowing the sovereign to pay off or repudiate government bonds."
Thus the rulers incurred debts in ancient Rome just like they were doing today.

I find that this reply perfectly explains the reason of debasement not just of coinage by government of ancient Rome, but devaluation of all subsequent types of money by all types of subsequent governments in the world. Two thousand years have passed since the days of Roman Empire but the elites of various countries kept making profit out of their citizens by manipulating their money. Now it is being done by almost all central banks with "the help" of inflation targeting policy. I'm addressing this issue later.

Money evolution continued and brought us "an advanced form" of Representative Money - banknotes:
"Banknotes were first issued in Europe by Stockholm Banco in 1661 and were again also used alongside coins. The Gold Standard, a monetary system where the medium of exchange are paper notes that are convertible into pre-set, fixed quantities of gold, replaced the use of gold coins as currency in the 17th–19th centuries in Europe. These gold standard notes were made legal tender, and redemption into gold coins was discouraged. By the beginning of the 20th century, almost all countries had adopted the gold standard, backing their legal tender notes with fixed amounts of gold."

Representative Money has still "represented" something of value, being backed by some kind of commodity like $50 U.S. gold certificate of 1928 was backed by gold at the statutory rate of $20.67 per troy ounce.

The next step in money evolution moved us (or we moved it) to Fiat Money:
"After World War II and the Bretton Woods Conference, most countries adopted fiat currencies that were fixed to the U.S. dollar. The U.S. dollar was in turn fixed to gold. In 1971 the U.S. government suspended the convertibility of the U.S. dollar to gold. After this many countries de-pegged their currencies from the U.S. dollar, and most of the world's currencies became unbacked by anything except the governments' fiat of legal tender and the ability to convert the money into goods via payment."

Fiat Money is the first money in history of mankind which has no intrinsic value at all:
"Fiat money is a currency (a medium of exchange) established as money, often by government regulation. Fiat money does not have intrinsic value and does not have use value (inherent utility, such as a cow or beaver pelt might have). It has value only because a government maintains its value, or because parties engaging in exchange agree on its value. ...
Government-issued fiat money banknotes were used first during the 11th century in China. Fiat money started to predominate during the 20th century. Since President Nixon's decision to decouple the US dollar from gold in 1971, a system of national fiat currencies has been used globally."

Thus the humanity has moved from real Commodity Money of absolute value to partly virtual Fiat Money of very relative value.

The most important thing about Fiat Money is: it cannot perform as store of value, unit of account and standard of deferred payment because of constant devaluation due to the policy of inflation targeting pursued by many countries.

(to be continued)

P.S. Dear Reader! I am very much interested in your opinion on the subject of this article. Please, write a comment or ask a question if you want to clarify something.
Igor Chykalov
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