The Changing Face Of Currency

Source: – Steve Beaman

The fundamental unit of trade for many thousands of years has been currency.  Initially, it was a precious metal stamped usually with a king’s name and face but it was used to create commerce.  As technology grew so did currencies moving into paper notes by the 11th century and greatly expanding paper currency by the 17th century.  Most of this currency was backed by some form of another commodity, typically silver or gold.  It is important to understand that neither silver or gold or anything else for that matter actually has a true “value” as value is always in the eye of the beholder.  Who says gold is worth so much per ounce?  Remember that in the 16th century in Holland there was a Tulip bubble in which people were paying a year’s wage to own Tulips.  Value is specious at best.

As the world changed by 1945 the United States came out of World War II in a unique position, it was largely unscathed by war and able therefore to provide a stable economic foundation to the entire world.  As such, in Bretton Woods, it was agreed that the U.S. dollar would become the world’s reserve currency and it would be convertible into gold as they underlying commodity value.  This system of a gold backed reserve currency held until 1972 when Richard Nixon, President of the United States, took the dollar off the “gold standard” and allowed it to freely float in value relative to other currencies.  This non-commodity backed dollar is known as “fiat money” as the only value in it is that which is perceived by users.  Therefore, it is only based on faith that consumers can take a dollar to the store and buy bread.  There really is no true value to the piece of paper, it simply has value because others agree that it does.

With all that understood it is easy to see why digital currencies became a possibility.  Bitcoin, an early participant in digital currency created a currency that had no physical manifestation but was purely an electronic entry but to give it some measure of value, the creators limited how many bitcoins could be created thereby giving it some measure of scarcity.  Bitcoin further put value in their “currency” by making it totally anonymous; neither the buyer or the seller in a bitcoin exchange know the identity of the other.  This is a huge boom for privacy but also a huge boom for criminals.  As Bitcoin because associated with the “deep web” purchases for things like guns, human trafficking and drugs became common.  It’s easy to see then why governments began to put a watchful eye on Bitcoin.

Image (c) btckeychain / Flickr / Digital Currency
Image (c) btckeychain / Flickr

Digital Currency And The Beanie Baby

As digital currency isn’t a “currency” it circumvents the laws in most countries against developing a competing currency.  In the U.S. for example, if you or I open a bank and have our own commodity based currency, say we offer silver backed currency, the federal government will prosecute us for creating a competing currency.  But with digital currencies, they’re more like trading in commodities than currency. For example, many of us recall the Beanie Baby bubble of the 1990’s.  Little stuffed animals with no real value became quite valuable and were traded for other things.  In a sense, these little furry toys were being used as currency.  Digital currencies are kind of like that, albeit much more sophisticated.

To the average consumer, the digital revolution in currencies won’t have much effect.  As we move more and more toward a cashless society, our usage of credit cards and debit cards will allow us to use our bank “credits” for the purchases we need.  However, if you’re a global traveler, it may become the case that Bitcoin or some future digital currency is cheaper to use rather than fighting between floating currency values and the money changers who take a commission to transfer your U.S. dollars to Euros.

Understanding currencies is important as your lifestyle is valued in currency.  We have all heard that we should hedge our portfolios with commodities, maybe you should hedge yours with a digital currency!