What is money, how is it created, and what is its future?
Hi, I’m Ofir and this week I shared a ShaperTalk on The Future of Money.
In the beginning…
Early money was a tool used to allow bartering to be networked. In a world where you could at first only perform direct trades, the introduction of money-- primarily in the form of precious metals, beans and rare feathers-- allowed multiple parties to perform trades among them. This was essentially the core logic behind money for millennia, until it finally changed in the 1500s.
Then, a radical idea
In the 1500s, goldsmiths would typically rent their gold safes to their clients. They wrote claim checks for the gold (early paper money). Since people rarely came back to demand the actual gold, and they certainly never came to claim it all at once, the goldsmiths had a radical idea: goldsmiths could lend other people’s gold with interest.
Over the next 200 years, the world experienced a tremendous growth boom; the discovery of the Americas and the golden age of European conquest created a record-breaking demand for credit.
Goldsmiths, who had increased the amount of credit in the economy by issuing multiple separate claim checks, were now very rich. This caused suspicion to rise among the townsfolk, and they decided to cash all their claim checks at once. Of course, the goldsmiths could not redeem all their bills and a panic took hold. (Check out this video for a good explanation, start at 52 seconds.)
Institutionalization and Regulation
After the panic, the rulers of the time did not outlaw this form of lending; indeed, it had become crucial to the expansion of their empires and growing tax revenue. Instead, the rulers of the time legalized and regulated the lending practices of the goldsmiths. The goldsmiths-- now managing full-blown banks-- could lend up to 9 times the amount of physical gold they had on site.
What’s the problem with this system? The bank issues loans with interest. In other words-- the total amount of money in existence is forever smaller that the total amount of debt (money lent plus the interest).
This system is great for those who lend, but it doesn’t always work well for those who borrow. The borrowers compete with each other in a game of “musical chairs” to repay their loans. The system is built in a way where someone always loses and goes into serious debt.
The Future of Money: Decentralized Computer Networks and Barter Networking
We continued to discuss how Bitcoin has introduced a new age of decentralized computer networks that replace the security and identification roles of banks. There is much literature available about the Bitcoin currency here, and I love to chat about this and other crypto currencies. Just message me - firstname.lastname@example.org.
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