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The nature of money is tragically one of the most unexamined and vital questions in modern society. Over the course of history, different monetary systems have risen and fallen as technology progressed and new forms of money emerged that were superior to what came before. To help us understand money, we must examine the question: “who controls the ledger?” As we explore the technological history of money and its various incarnations, from informal social credit to commodity-backed systems, we can gain insight into how
control over the monetary ledger impacts individual liberty, economic prosperity, and human flourishing.
In the Austrian tradition, figures like
Carl Menger,
Ludwig von Mises, and many others have written extensively about the function of money. At its core,
money enables indirect exchange as a medium to facilitate transactions. In small communities, social credit systems can adequately regulate resources through direct exchange. However, as these communities grow, indirect exchange through money becomes essential. Expanding the division of labor and specialization requires more complex economic calculations. The increasing sophistication of wants necessitates indirect transactions between distant parties.
Most crucially, direct exchange relies on trust and familiarity between counterparties, which erodes with scale. Money arose to enable growing communities to reap the benefits of economic expansion through indirect exchange. Without sound money, rising productivity and specialization cannot be effectively coordinated. The Austrian tradition recognizes how critical the monetary framework is in an evolving economy.
Naturally, certain commodities are selected as monies within the market economy due to their optimal monetary properties as a monetary technology. Said differently, The most
salable good, which has the lowest rate of declining marginal utility will be chosen to facilitate indirect trade.
The primary monetary properties of scarcity, durability, portability, divisibility, fungibility, and verifiability give way to the salability of goods across time and space. Sea shells, beads, silver, and gold are all examples of different commodities that have historically been used as different mediums of exchange for their respective strengths in these monetary properties.
Lyn Alden, in her recent book,
Broken Money: Why Our Financial System is Failing Us and How We Can Make it Better reexamines the question of what money is through her ledger theory of money. She writes:
“A ledger theory of money observes that most forms of exchange are improved by having a salable unit of account that can be held and transferred over both time and space, and that this unit of account implies the existence of a ledger, either literally or in the abstract. These monetary units and the ledger that defines them rely either on human administrators or on natural laws to maintain their stability across time and space.”
Through this lens, we can come to a better understanding of
What Has Government Done to Our Money? The cumbersome nature of physical gold as a medium of exchange ultimately led to the adoption of paper currency, and eventually fiat money no longer backed by commodities. Storing, transporting, and verifying pure gold for transactions became increasingly impractical as economies grew and developed technologically.
Gold's weight and risk of theft made storage expensive. Assaying gold to verify purity was difficult for everyday commerce. And transporting adequate gold for large transactions was hazardous. Paper currency provided a lighter, more portable proxy for gold that was more practical for exchange. However, it still depended on central authorities securing adequate gold reserves to maintain convertibility. This constrained monetary policy, as the expansion of currency was limited by gold supplies.
Over time, the constraints of gold convertibility frustrated governments and central banks. Suspending convertibility in 1971 allowed greater control over money supply and interest rates, providing more policy flexibility. But without commodity backing, fiat currency carries greater risks of inflation, hyperinflation, and other negative externalities. Alden continues:
“The technology of banking systems and paper banknotes in various denominations backed by gold improved gold's effective divisibility. And then, in addition to exchanging paper, people could eventually "send" money over telecommunication lines to other parts of the world, using banks and their ledgers as custodial intermediaries. This was the gold standard - the backing of paper currencies and financial communication systems with gold.”
“For a gold-backed banking system, the only part of the ledger that individual users have control of is the precious metal coins that they retain in their own custody, and for that they rely on the properties of nature to maintain the integrity of the ledger. Once they surrender coins over to the banking system, they have begun to rely on a hierarchy of other people to control their money.”
In the context of Alden’s ledger theory, the supply of gold is controlled by nature and natural laws
. Fiat, in contrast, is controlled by human administration and unequivocally by the State. This explanation is the simple answer to what the government has done to our money. The State has taken control of the monetary ledger away from natural law and used that power to facilitate its metastatic growth. Moreover, it has exerted this control as one of its exclusive monopoly privileges. As advocates for free markets, individual property rights, and the right to self-determination nothing is more imperative in our time than separating money from State. The great Friedrich A. Hayek, who advocated for the
Denationalisation of Money, famously
stated:
“I don't believe we shall ever have a good money again before we take the thing out of the hands of government, that is, we can't take it violently out of the hands of government, all we can do is by some sly roundabout way introduce something that they can't stop”
For the past 15 years, Bitcoin has emerged and continued to develop into a possible sly roundabout way that Hayek hypothesized. Initially and abstractly, Bitcoin was conceived of as a
Peer-to-Peer Electronic Cash System. A decentralized ledger system utilizing cryptographic digital signatures to enforce the concept of perfect digital scarcity. Bitcoin, as a monetary unit, represents a digitally native bearer commodity asset, a truly revolutionary concept. In the context of Alden’s ledger theory of money, she writes:
“Gold has long been turned to as a form of defense and savings, but it's not a useful transactional money in the digital age. The Bitcoin network presents a newer and faster alternative, where nobody can create bitcoin for free, and thus nobody has the power of seigniorage”
Bitcoin closes the speed gap between transactions and settlements. Ever since the invention and deployment of intercontinental telecommunication systems in the second half of the 19th century, transactions have been able to move around the world at the speed of light, while scarce, self-custodial bearer asset money (e.g., gold) could only be transported and verified at the speed of matter. This speed gap opened a massive arbitrage opportunity for banks and governments to use, because it gave them custodial monopolies over fast long-distance payments. Bitcoin represents the first significant way to settle scarce value at the speed of light.
