The definition of money
Seashells. Chocolate. Rice. Bitcoin.
What do these seemingly random items have in common?
They’re all forms of money, of course!
It’s true. The cowrie shell was used for years as a currency in many parts of the world, including parts of Africa as well as China and India. It was a distinct shape, small and light, with a unique texture that made it difficult to copy. It was plentiful in some parts of the world, where it was worth relatively little, yet was worth a large sum of goods in parts of the world that were further from a supply of the shells.
Chocolate was of great value in the Aztec culture in the form of cocoa beans. Interestingly, production of the cocoa bean was restricted to ensure its value as a tradeable currency. This restriction allowed the value of the cocoa bean to remain relatively high and therefore tradeable as a currency. It was an accepted means of trading “money” for all manner of goods throughout much of what is now Latin America.
In feudal 17th century Japan, rice essentially played the role that money plays in society today. It was used as a form of value exchange, tax payment, and wage payment for workers. Rice, being quite light and easy to transport, plus being able to be preserved for nearly a decade, was a highly useful currency for quite some time. When rice began being overtaken by metallic currencies, many were uneasy with the societal shift that would be caused by such a change.
All of these currencies operate under the basic premises of consensus and supply and demand. In these societies, a consensus existed that agreed to assign a value to an item that might have been seen by outsiders as an irrational and worthless value. Yet, they worked because the society that traded them agreed to their value, and thus, the currency allowed for trade and economic interaction. The basic premise of the free market principle of supply and demand also held true and consistent with this system, as an over-supply of shells, for example, rendered them worth considerably less than they were in far-flung locales where they were difficult to attain.
Of course, modern society views money mostly in its form as a paper currency, and more often now, a digitally transacted currency, called fiat. Some commodities, such as gold and silver, can also be fairly easily traded as a form of money. Fiat however, is fundamentally different from all of these other forms of money in a few very important ways.
It used to be that the American dollar was tied directly to the value of gold and could be redeemed for a dollar worth of gold. Pretty much all currencies in the world compared their currency to the American dollar because the American dollar was comparable to gold in value. Gold, like the other currencies that the world traded, is limited in supply and has an agreed-upon market value.
In 1971, Richard Nixon’s administration changed the role of the U.S. dollar, declaring it no longer to be tied directly to the value of gold and not internationally redeemable for a dollar’s worth of the commodity. Instead, the dollar would simply be valued based on the economy’s strength and by government and military backing. Thus, fiat was born.
Fiat has an entirely arbitrary value, which one could argue is also true of rice, cocoa, or seashells, except one major caveat. Fiat can be printed infinitely by issuing debt, without any limitations on quantities of printing, except what is deemed appropriate by governments. This is a big problem.
Of course, I haven’t mentioned Bitcoin yet, but you could see where this is going. In a Supreme Court case regarding taxation of stocks, justice Stephen Breyer noted in his ruling:
“Moreover, what we view as money has changed over time. Cowrie shells once were such a medium but no longer are … our currency originally included gold coins and bullion, but, after 1934, gold could not be used as a medium of exchange… [P]erhaps one day employees will be paid in bitcoin or some other type of cryptocurrency.” (source)
Now, the case was not about Bitcoin, per se. But the justice makes a good point. Bitcoin and cryptocurrency are beginning to receive more recognition as legitimate forms of money.
And why not?
Bitcoin is inherently limited in supply, with only 21 million Bitcoin ever to be mined. Bitcoin has an agreed-upon market value that allows it to be traded for goods amongst those who are willing to accept it in trade. Of course, there is still uneasiness and distrust surrounding this new currency, just like there was in Japan when metallic currencies first entered the scene. But the number of people accepting Bitcoin and other cryptocurrencies as tradeable currency is steadily growing.
If anything, it’s fiat money, with its lack of scarcity and a value that is constantly dwindling due to a constantly increasing supply, that does not stand up to the age-old concept of what money really should be.