Bitcoin: A Paradigm Shift of the Global Monetary System? (Part 1/3)

In 1962, Thomas Kuhn created a landmark publication named The Structure of Scientific Revolutions. Kuhn’s main argument is that scientific progress doesn’t exclusively stem from the gradual accumulation of facts, but from a changing set of circumstances and possibilities that lead to radically new perspectives and breakthroughs – a “paradigm shift”.

Throughout time, technology has been the driving force for changing the world we live in. Continually destroying old paradigms and creating new ones. From the advent of the electric motor in 1821 by Michael Faraday; the automobile in 1886 by Carl Benz; the creation of the worldwide web in 1989 by Tim Berners-Lee; and to the creation of bitcoin: the first peer-to-peer decentralised monetary network in 2009. In this article, I’ll be covering why I believe cryptocurrencies, and more specifically bitcoin, is a paradigm shift in money and the global economy.

Before delving into bitcoin, we first need to define money and its properties.

What Money Is

Money in its purest form is a medium for the exchange of value. In 1875, mathematician, logician and economist William Stanley Jevons proposed that money had four main qualities:

1. A medium of exchange – a combination of recognisability and acceptability across time and space for the exchange of goods and services.
2. A measure of value – a money must be able to provide a unit of account that can be used to measure value of other things.
3. A store of value – in order to be an effective store of value, money must be scarce and durable over time
4. A standard of deferred value – an ideal money should have the ability to be loaned and repaid over time

What Money Isn’t

What most people call money today is fiat currency. The Latin etymology of fiat can be translated as ‘let it be done’. In today’s world, fiat simply means that central banks and governments have declared that it is legal tender for the payment for goods, services, and taxes. Fiat currency is often confused with money as it shares many of the same properties, but ultimately pails as a store of value over time.

While the advent of money has been critical to the functioning of society and enabling global trade, we have diverged from the basic principles and properties which economists like William Jevons knew were essential for good or ‘hard money’. To illustrate what good money is, we can take a brief look at humanities previous attempts of creating money and some of the entertainingly obvious pitfalls.

A Brief History of Money

Over millennia, humans have created thousands of different forms of money, most of which failed or were replaced over time. Below are just a few of the more infamous one’s:

• 9000 – 6000BC – Cattle
• 3000 – 650BC – Mesopotamian Shekel
• 1200BC – Cowrie Shells
• 118BC – Leather Money
• 1252 – 1533 – The Fiorino D’oro or Gold Florin
• 1500 – 1800 – Rai stones (weighing up to 4,000kg!)
• 1500 – 1900 – Trade beads
• 1816 – 1930s – Gold
• 1930s to present – Fiat currency

The problems with many of these forms of ‘money’ are evident. Cattle aren’t easily divisible unless you’re chopping them up for meat. They’re also cumbersome, non-durable (think rotting meat) and slow to transport. Also, not everyone wants cattle, try selling beef to India. Shells, leather money, glass beads and stones lack standardisation and unit of account properties. Each of them bearing different sizes, shapes, and weights.

Eventually, we shifted away from livestock and stones towards precious metal coins of standardised size, weight, and purity. For example, around two millennia ago, the Roman empire successfully minted and spread the denarius coin across continents and countries. The denarius was ~98% silver and consistent in weight and size, serving as a reliable money at the time. As the centuries went by, the denarius was devalued as subsequent emperors and merchants shaved coins and saved precious metal reserves by reducing the silver purity to less than 80%. Consequently, the denarius lost value and the trust of those who traded it.

Centuries later, in 1252, Florence minted the first Fiorino D’oro (the gold Florin) – a coin precisely 3.5 grams in weight and made of gold. It’s scarcity and properties as a hard money rapidly gained status across merchants and governments as a trustworthy money for trade and as base money for the exchange rate of other moneys across Europe. Once again, money with preservation of value qualities like the Florin was shown to be highly valuable through rapid uptake and demand.

Unfortunately, with precious metals such as gold, there are still pitfalls. Gold is regularly forged; it is extremely cumbersome and expensive to transport, and it’s supply increases as the value goes up. The more valuable gold becomes, the more miners are employed to dig it out of the ground, increase supply, and drive the price back down again. Each year, about 2% more gold is added to the global supply.

The emergence of fiat currencies

Fiat currencies solved for many of the problems of gold, especially digital fiat which is highly transportable across time and space thanks to the internet. However, while fiat currencies used to be redeemable for gold and held their value, after 1971 when President Nixon took the U.S dollar off the gold standard we entered uncharted territory. So began the free-floating global currency markets we have today.

Stay tuned for the second part where I’ll delve into fiat currencies and the removal of gold as the base layer money of the world’s economy.