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Bitcoin: Dispelling the Modern Myth of Money
Six years since the inception of Bitcoin, awareness of this stateless currency has grown exponentially. Even though consumer adoption has barely gotten off the ground, investments are pouring into this expanding ecosystem. Total VC investment into the Bitcoin infrastructure in 2014 ($335m) has exceeded the $250m invested in the similar phase with Internet startups in 1995. Even mainstream media, which has regularly slammed Bitcoin in the past, seems to be catching up with a basic understanding of this technology and embracing its potential. Yet, critics continue to throw around the same old questions about Bitcoin’s value and what really backs it. Unlike precious metals like gold, many argue that this new currency has no intrinsic value.
This question reveals a prevailing myth that’s embedded in modern economics: that money emerged from markets where commodities were bartered. Before Bitcoin began shaking up standard notions of money, a similar challenge had come from a scholar outside of the discipline of economics. In his book, Debt: The First 5,000 Years, anthropologist David Graeber dismantled economists’ idea of barter as the origin of money. Instead, he noted how money was actually a complex credit arrangement before the invention of coin or cash.
Graeber explained that when people exchanged goods in ancient times, what they were actually doing was a form of giving as a neighborly favor. Credit was issued by a person who received a gift or something that they needed, voluntarily acknowledging and giving credit for this altruistic deed. This simultaneously created a ‘debt’ for the recipient with a sense of ‘I owe you one’.
Long before money moved into coins or commodities like gold, clay tablets were used in Mesopotamia to record these debts and credits. This was a kind of virtual money tied to a ledger that kept track of all these transfers of value. So it seems money emerged from a social network that grew out of intrinsic ties between people.
What mediated these exchanges was not a piece of gold or paper money, but something intangible, like a sense of brotherhood or simple kindness in each person’s willingness to give, receive and offer a gift in turn. Eventually this became a mutual credit system, creating continuous circles of giving through delayed altruism that accounted for favors that were later to be returned by others.
Debt as Imposed Obligation
Graber noted that the centralization of money occurred possibly as early as the rise of the state in ancient Egypt and the huge bureaucratic temples of Mesopotamia. Later, as societies entered the age of modern coinage, transactions became more abstract and impersonal. The idea of money became divorced from this prior understanding as something embedded in a web of social relationships. Instead, the value of money came to be assigned in commodities—tangible material objects that were purported to have intrinsic value in and of themselves.
In her book Web of Debt, attorney Ellen Brown describes how “the coinage system was commodity-based.” It “assumed that ‘money’ was something having value in itself (gold or silver), which was bartered or traded for goods and services of equal value.” Brown points out how money then became legal tender by decree, when governments decided that it would represent “units of value that can be traded in the market, a receipt for goods or services that can legally be tendered for other goods or services.”
Once money came to be seen as an abstract unit of exchange, it began to lose connection to its origins as an asset ledger that recorded the accounts of neighborly favors. This change moved economies in the direction of materialism, and promoted the pursuit of profit in the form of mass production and consumption. Eventually this led to investment banks creating financial products like derivatives that promoted speculation and delinked money even further from its communal foundations. Economists were then elevated into the position of a new priesthood to guide lay people through what had become the complex and esoteric labyrinth of the modern financial system. As these experts preached their market theology, money became less attached to concrete realities.
Derived from skewed ideas about the origins of money, this doctrine of economic theory has obscured the true story of value creation. It prevented people from examining and questioning the legitimacy of central banks’ authority over the ledger of debts and credits and their interference in everyday transactions. In paper money systems, unelected minorities who control accounting can manipulate the record of favors between neighbors by creating credits for work they haven’t done, or value they haven’t created, because they have the ability to print money at will through ‘fractional reserve lending’ and simple control of the fiat currency spigot.
Instead of giving favors, modern banks lend people money with the duty to pay back interest. The recipients become borrowers with promissory notes for repayment. Units of exchange created by centralized authority are debts not based on voluntary favor, but on abstract numbers representing interest obligation imposed upon people. This centralized control of money took away each person’s power to account for the favors of others, to issue personal credit and debt out of themselves. This injected an imbalance of power in favor of creditors. It broke the circle of giving and encouraged systematic oligarchic hoarding and coercion, which tends to devolve into usury and corruption.
Now, under the guise of ‘global monetary cooperation’, the World Bank and International Monetary Fund (IMF) coerce third world nations into financial cooptation. These organizations backed by Washington consensus indebt whole populations and subjugate them to Western ideas of ‘progress’ and ‘development’.
Along with central banks’ power to issue money, the centralized control over payment networks further facilitates these exploitative relationships. Payment systems such as Visa and MasterCard are presented as independent networks, when in reality they are oligopolies that collude with the state. They impose sanctions on whole countries and engage in the kind of financial blockades through which, for example, WikiLeaks was prevented from accessing donations following their publication of U.S. State Department cables in 2010.
Bitcoin challenges this modern fable of money. It reveals how all money is simply a ledger, not backed up by anything and with no intrinsic value in and of itself. Silicon Valley tech entrepreneur and author Andreas Antonopoulos explains how Bitcoin is a distributed system with no company, service, issuer or clearing house. He notes that what distinguishes this ledger from others is how it is decentralized and distributes control.
Bitcoin self-regulates through algorithm. While fiat currency is based on debts and central banks issue money without any real work, with Bitcoin, money creation involves ‘proof of work’ through a process called mining, where globally spread computers apply significant computational power to find a numeric solution to a specific algorithm. This serves the vital function of checking all the transactions in the network as well as securing the system.
In the beginning was the blockchain protocol; algorithmic consensus that agrees on the state of all transactions. Out of it came the Bitcoin network as a payment system and bitcoin as a store of value and unit of exchange. They are all one in this unprecedented open borderless network. Entry into this system is voluntary, unlike debt-based monetary systems like the U.S. dollar, which as economist Paul Krugman described is “backed by men with guns”. Bitcoin adoption occurs when users out of themselves recognize its utility and choose to participate in the network.
Wider adoption creates a network effect of value appreciation, with an effect of enriching all in the network. In a sense, this is an acknowledgment of the gift given by those who took a risk at an early stage to innovate, invest and also support the development of the infrastructure for this global public asset ledger. It is like saying to the anonymous creator, Satoshi Nakamoto and all who contributed to this innovation: I don’t know who you are, but I owe you one and here is my token of appreciation to return the favor of making this invention that benefit all who freely choose to use it.
If this new technology is stewarded to fully manifest its protocol of decentralized consensus, it has the potential to bring money closer to its origins in terms of reciprocal social relations. Humanized transactions that were once experienced in smaller communities are now possible at a global scale. Bitcoin as the Internet of money delinks values that are frozen in hard materials to instill the new valuation process based on human relationship such as kindness and love as well as hard work. This is seen in a fast growing usage of this currency in charitable giving and tipping.
With this open source protocol, there are now many altcoins. Together, these decentralized cryptocurrencies can facilitate the creation of truly free markets that allow price discovery processes based on peer-to-peer direct trade, independent from states or too-big-to-fail mega-corporations.
As the world’s first transnational currency of the digital age, Bitcoin has the potential to reconcile communal values with individual freedom in the form of reciprocal peer-to-peer exchanges. The network effect of free individuals working together can break the insidious loop of debt spirals and extraction. It can foster a circle of giving that springs from our indebtedness to one another, creating a new story of money that helps transform who we are as citizens of this emerging global civil society.