Super powers

by David Birch

[Dave Birch] A superpower is bogged down in a distant guerrilla war. The superpower must resupply its army, victorious for a generation, thousands of miles away from home and it’s become a very costly endeavour indeed. Support for the war at home is tentative, and is dividing both the people and the political leadership. The guerrillas are supported by the superpower’s greatest enemy, a nation that is providing both financial and military assistance. The war drags on and the casualties mount. Generals are disgraced. The rebels continue to gain momentum, even though they are occasionally beaten. Afghanistan? No. Vietnam? No, this is historian Kenneth Davis’ marvelous description of British North America in 1782.

The American colonies at the turn of the 18th century: a time when bullion for coins was scarce because Britain wouldn’t export any. The colonists used sea shells (known as wampum) for their medium of exchange, a form of cash borrowed from the native Americans. The indigenous people were, in effect, the central bankers of this monetary system, converting the shells into animal pelts which were used to store wealth and for external trade (since, outside the colonies, the wampum were worthless but beaver pelts — in particular — weren’t). Interestingly, contracts between buyers and sellers were denominated in Sterling (which many of the colonists might never have actually seen) and quoted in gold or silver (which they didn’t have). When contracts fell due, the gold payment in Sterling was commuted into some equivalent payment in wampum, or some other acceptable medium. Technically speaking, the means of exchange, store of value, unit of account and mechanism for deferred payment were distinct.

The shortage of bullion for coins led the colonies into the forefront of the last great revolution in money: the issuing of banknotes not as a means of substituting for some otherwise inconvenient means of exchange but as a means of creating money. There’s a very great difference between the issuing of banknotes as a claim on a bar of gold in a vault somewhere (because banknotes are more convenient for trade than bars of gold) and the issuing of banknotes because there isn’t any gold in the vault at all. Starting with the Massachusetts Bay Colony in 1690, banknotes were issued by impoverished authorities to avoid the high costs and uncertainties associated with borrowing and the need to impose taxation.

Why should we ponder these colonial experiments? Well, I think that since the entry level barriers to virtual financial businesses are very low, we might expect to see monetary experimentation on par with the young United States and it’s therefore quite likely that the most revolutionary impact of digital money might come from its ability to create new stores of value rather than its ability to act as a more convenient means of exchange.

What would it mean to create new stores of value? On the frontier and in the colonies the store of value was related to some physical good such as gold, or whatever: the United States was on a tobacco standard for twice as long as it was on a gold standard since tobacco was made legal tender in Virginia in 1642 (by the interesting device of outlawing contracts calling for payments made in gold or silver) and remained so for two centuries. The US gold standard, by contrast, lasted only from 1879 to 1971. Who would bet against a new standard emerging in cyberspace — the mobile talk minute standard, for example — that is not related to some commodity but instead represents a claim against future production?

If the colony analogy is to hold, we would indeed expect just such a development and the emergence of a whole new virtual finance industry as different from our existing finance industry as fractional reserve banking is from the striking of electrum coins in Lydia. Of course, if we stick with the analogy it tells us something even more interesting: that inappropriate taxation and unenforceable unfair legislation will lead to secession.

Secession? Well, while I wholly agree with Francis Fukuyama that the Founding Fathers did not have economic efficiency as their primary motivation, it’s easy to see economics in the roots of the disputes that emerged: a distant colony where conditions are different, politicians taking actions they feel constrained to implement even while they are being advised that they are acting against the nation’s best interests (on, for example, copyright!). Will this mean more innovation?

[Please note: this is an extract from a book I am developing on the history of the technology of money. Any comments, criticisms or suggestions would be gratefully received and will, of course, be credited.]

Creating money is easy. The hard part is getting it accepted.
Economist Hyam Minsky (1986).

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