As far back as 221BC during the reign of the first Chinese emperor, Qin Shihuangdi, the Chinese were using coins but they were not the originators of coins as historical references to a standardized and certified system of coinage is attributed to Lydia, (in present day Turkey, circa 600BC) where coins made of gold and silver (electrum) were used as a means of exchange in trade. Still, the use of metals in trade was not original to the Lydians as there are historical references to various measures (minas and sheckel) of silver and copper used amongst Babylonian traders, circa 2000BC.

The adoption of coins and abandonment of many culturally different barter items such as grain, squirrel skins, cattle, peppers, whale tooth, cowrie etc, was not overnight and even when through conquest or convenience coins had been accepted, they were still plagued problems like counterfeiting, standardization and scarcity.

A look through a coin cabinet in most history museums would show coins from different epochs and regions, of different shapes, sizes and quality (bearing various proportions of silver, gold or iron) but what guides us as to their origin is the sovereign’s seal because then as today, rulers of the land had monopoly over coin minting and standards and any counterfeiters caught usually paid the ultimate price with their lives.

If, however, the problem of counterfeiting and standardization were solved by the sword and seal, it was not so easy to resolve scarcity of money as many expeditions and wars were initiated by rulers desperate to improve their coffers. The motive was simple enough, the more silver and gold coinage they accumulated, the greater the resources they commanded towards a larger army and fleet for more plunder and the building of empires.

But the idea of money facilitated more than just fleets and armies. As a medium of exchange for immediate and deferred payment it made buy-sell transactions faster and removed the delays brought about by the “double coincidence of barter”. It motivated people not only to produce goods and services to sell or, to employ and recompense, but went a long way to facilitate European banking as we know it from the example of 14th century Florence.

When a shortage of copper pushed 7th century China to rely on paper with no intrinsic worth for money, and much later in Europe, when knights and tradesmen began using bills of exchange as a means of transferring large sums of money, the banknote was born. From the onset, these often privately issued promissory notes were backed by an equivalent amount of silver, gold or coinage which could be produced upon demand. But as in coin minting, printing of notes also became the preserve of governments and over time, fiduciary money became fiat money. In 1944 concerns about the post war economies pushed 44 countries around the world into an agreement for a global system of trade and finance in the Bretton Woods Agreement, underpinned by the free convertibility of US dollars into gold.

But then, after the ‘Nixon Shock’ of August 1971, in which the Nixon Government terminated the free convertibility of US dollars to gold, Bretton Woods was dead and without any other similar arrangement, to take its place, countries have had to float their currencies ever since.

Prof. Glyn Davies in his History of Money notes that habitual debasement of Roman coins by successive rulers meant the Roman currency suffered rampant inflation. While latter day devaluations might not be on the same scale as the Romans, the loose monetary policies pursued by leading central banks across the world are setting the scene for severe inflationary pressures when eventually the elusive growth takes hold. Meanwhile, nervous investors have been taking positions to hedge themselves against the perceived impending inflation by amongst other things, being long on gold which from Bloomberg, has enjoyed a 12 year bull run. That run was however rudely interrupted on April 15th 2013 when gold prices dropped $144 in a severe sell off – the largest seen in three decades.

What happened? Investors took flight in their fright from the Fed’s warnings of pulling back on their bond buying program, also reports on soft growth data from China and Europe, as well as the noises from the Cypriot government regarding the sale of 400 million Euros worth of gold reserves held by the Cypriot central bank.

The World Gold Council reports that global central banks own about 31.7 thousand metric tons of gold representing 19% of all gold mined, that leaves plenty more held by corporations, organisations and individuals around the world. It must be remembered that on its own gold pays no interest, no dividends and investors are using it primarily as a store of value in anticipation of inflation. Therefore, the dip in prices are giving many an opportunity to buy and Bloomberg reports that the sales of gold coins (American Eagles) have more than doubled this year as shoppers from India, China and (with the BOJ redoubling its intentions to reflate the Japanese economy, it’s no surprise) Japanese consumers are also becoming net buyers of gold.

While our love for precious metals like gold may have remained undiminished through history, what we have used for trade – shekels, denarius, drachmas, thalers, ducats, pieces of eight, farthings etc to banknotes have undergone continuous transformation and more so in the twentieth century than any other time in history.

Now on payday, workers get paid electronically into their bank accounts. They go out shopping and purchase goods or services online or on the high street without ever seeing a coin or bank note. Also, everyday, according to a Bank of International Settlements survey, (2010) it’s estimated that about four trillions US dollars are exchanged daily in FOREX transactions. With this volume of money transactions being electronic, it can be said money itself has gone virtual. “In God we trust” written on a dollar bill, is a statement which now also encompasses the trust of the cryptographic secure session held between secured clients and secured servers but also according to Prof. Niall Ferguson in The Ascent Of Money, trust that the issuer of the currency, central bank, does not indulge in wanton debasement.

With this representation of real money transactions via EFT, (Electronic Fund Transfers), it is unsurprising to see the rise of virtual money on the internet such as Lindens from Second Life, QQ Coins from Tencent, Facebook credits, Litecoin and Bitcoins.

The World Street Journal finds the use of virtual currencies is driven by the same thing which drives the use of real currencies. Trust. And it is that trust that has fuelled a virtual asset base of about $2 billion in real money and growing.

Bitcoins were introduced in 2009 by a Japanese called Satashi Nakamoto and at the beginning, a bitcoin was worth $15. However, Bitcoin supply is restricted, through complex mathematical problems which have to be solved during the ‘mining’ of Bitcoins. With this constricted supply, it is little surprise then that on April 10th when demand for Bitcoins surged, prices spiked at $260 before it crashing to $105 on Mt. Gox, the largest bitcoin exchange. The price has since recovered but the wild fluctuations exposed flaws of the virtual currency and vindicated some of its critics.

Critics note that acceptability of Bitcoins as means of payment for online transactions is still limited and that many individuals are buying bitcoins not for the purposes of trade but in speculation that as transaction volumes increase with the increase in participation and popularity of the virtual currency, its value would strengthen.

The attraction of Bitcoins is obvious because like the very medium it sprouted to serve, the internet, the currency is devoid of government control and with the ultimate number of Bitcoins that could ever exist capped at 21 million, the speculation is that demand would always outstrip supply and theoretically, the price will always appreciate. Therefore to some the virtual currency represents the perfect antidote to the major central banks, (The Fed, BOE, BOJ, ECB) all locked in a cycle of devaluation.

The Economist points out Bitcoin links to illegality on the internet as one of the stumbling blocks to wider acceptability, but in a Bloomberg interview Mark Karpeles, the founder of Mt. Gox the largest Bitcoin exchange noted the numbers flocking to open accounts has increased on a monthly average of 66% from January to April, with the implication that the recent price gyrations and reported security issues have not been a deterrent to investing in Bitcoins. Yet, the number of merchants accepting Bitcoins is still relatively small because to become mainstream, a major retailer like Amazon needs to take it on board. But most probably, the major retailers are all watching closely the experience of Reddit or WordPress, which have recently began accepting bitcoins.

Barter has long been transformed into multidimensional commerce with the use of coinage and notes but in recent years, trading has shifted gears with online commerce as people seek cheaper prices, a wider range of products and convenience of time or location. Payment is via Paypal, Visa, American Express or some other credit / debit card however, the access to virtual representations of customer real money accounts comes at a cost to merchants hence this makes virtual currencies like Bitcoins with lower transaction costs an attractive alternative.

From the perspective of Sir Tim Berners-Lee’s first web page at CERN which gave birth to today’s billions of web pages and links, it’s possible to refer to Satashi Nakamoto and co as pioneers of something a lot more than they originally intended. Other virtual currencies are mushrooming e.g. Ripple from OpenCoin is expected to be operational from May 2013 and LiteCoin already shadows Bitcoin(and offers faster transaction times). There would be fortunes made and lost in virtual currency speculation as bubbles grow and burst. As the internet facilitated freedom of speech and democratised information where it was a preserve of a few (e.g. the ‘Arab Spring’) , there are some suggestions that Bitcoins are heralding a universal / global currency free of government control and taxation. This libertarian and somewhat anarchic view may not be very difficult to imagine because even Prof. Glyn Davies notes that technology has “made geographical boundaries obsolete insofar as the movement of money is concerned”. Yet our entrenched national pride in sterling, dollar, yen, euro or roubles etc and, despite the recent gold sell-off, our persistent age-old allure for the precious metal means real money would persist for a while yet. That said technology, the internet and virtualisation of currencies in bitcoins or some other incarnation are here to stay.

Lloney Monono
Bristol, UK

Categories: Finance