Money Theory And Crypto
Gold coins and dollar bills have value
only in our common imagination
Yuval Noah Harari
During the late 2017 bitcoin and other crypto assets hype, many people got curious if there is any intrinsic value in crypto. Skeptics argued that there is none, given that cryptocurrencies and tokens have no underlying assets behind.
Two of the most widely quoted crypto antagonists were Warren Buffett who is well known for his conservative approach to any assets, the other one was Jamie Dimon of JPMorgan Chase. Yet recent developments revealed that JPMorgan started working on its own stablecoin named JPM Coin, and Warren Buffet is not so rigid about crypto anymore although has not invested so far.
The debate remains open: does crypto really have to be backed by some real-world assets, or it’s a completely another world and a new economy? Let’s dig a bit into how it all started and where the money came from.
Rai stones
Let’s go back in time and fly to Micronesian tropical island of Yap, the region that had no ties to the Western civilization prior to XIX. It was Dr. William Henry Furness III, a recognized American ethnography researcher, who discovered amazing things about how people of Yap treated money as a means of payment. They used “Rai” stones, circular disks with a hole in the middle. The stones varied widely in their size: the largest was 4 meters in diameter and 0.5m thick and weighed up to 4 tons. Smaller “Rais” could have a diameter of 7cm.
But size was not the most exciting feature of this kind of currency. Dr. Furness observed that Yapese people often did not physically withdraw Rai stones after a deal (trade) was closed. Counterparties simply agreed that particular stone now belonged to a seller, and the buyer ceased to own the stone.
But the most amazing part of the story was one family everyone knew to be a wealthy one since they owned one of the biggest Rai stones ever. That giant was lying on the seabed following a shipwreck many years ago. No living soul saw this stone, people just knew about it from the grannies’ stories. Yet, nobody questioned the stone in that family’s possession.
This leads up to an important conclusion: money, wealth, ownership and property only exist in connection with people’s perception of those. Or, to put it differently, it’s irrelevant if one owns anything or not unless the society accepts the ownership.
Money: reality or figment of imagination?
Dr. Furness published his findings in 1910, and they had a big impact on economic discoveries and monetary theory. Two of the greatest economic minds of XX, John Maynard Keynes and Milton Friedman, treated Yapese Rai stones phenomenon not just an exclusion from the “general nature” of money. On the contrary, they understood that Rai stones perfectly illustrate the essence of money. In fact, today we see that the ancient Yapese system has a lot in common with the ways modern central banks operate.
It appears that money is not just a medium of exchange; it is rather a social mechanism that measures debts and creditworthiness. Both Rai stones and modern currencies represent a convenient bookkeeping tool to measure provisions and obligations. But money differs from ordinary debts for its ability to be transferred to any counterparty.
Felix Martin in his book “Money: The Unauthorized Biography” talks about the great physicist Richard Feynman who came up with an example of how we treat visible processes: static electricity generated using a plastic comb can be used to levitate a piece of paper. We never stop, he explained, to be entertained and amazed by this trick. The reason is that we are used to forces that we can see with our eyes, like our hand touching the comb itself, experiencing resistance, and so we think only these forces are real. But in reality, only the electromagnetic field in this example is a fundamental one, forcing a piece of paper to move from the comb.
It is similar to money: coins and banknotes are what we see. But the fundamental law behind them is social technology and transferrable debts. Modern historian Yuval Noah Harari has a way to explain this presented in his famous book “Sapiens: A Brief Theory of Humankind”:
“Gold coins and dollar bills have value only in our common imagination… Money isn’t a material reality — it is a mental construct… But why does it succeed? Why should anyone be willing to exchange a fertile rice paddy for a handful of useless gold coins? Why are you willing to flip hamburgers, sell health insurance, or babysit three obnoxious brats when all you get for your exertions is a few pieces of colored paper? People are willing to do such things when they trust the figments of their collective imagination.”
Followed by:
“Ever since the Cognitive Revolution, Sapiens have been living in a dual reality. On the one hand, the objective reality of rivers, trees, and lions; and on the other hand, the imagined reality of gods, nations and corporations. As time went by, the imagined reality became ever more powerful, so that today the very survival of rivers, trees, and lions depends on the grace of imagined entities such as the United States and Google.”
Conclusion (a sort of)
Nearly all coins in history that people used as payment were either made of precious metals or secured by them. And all of them were issued by some authority, whether it was a king’s treasury or a country’s central bank. This “gold standard” mechanism was a long living one (and that is why price inflation was almost non-existent for centuries). However, in 1931 Great Britain detached its pound from the gold standard, and the USA did the same with its dollar in 1933. Some European countries kept sticking to the gold standard but it was canceled in full by 1971 as all western countries accepted the US dollar as a world primary reserve currency. At the same time, inflation became the real threat, since governments could print money in any quantity.
Speaking in modern term, all gold and silver collateralized currencies could be called first stablecoins. And, to put it bluntly, there must be either trust or backing behind any stable currency. Once there is no trust in the issuing government, there must be some reserve presented, and if there’s none, the currency gets futile.
Today’s technologies allow for a very different approach to stablecoins, both in terms of underlying assets used and issuance and accounting techniques. We strongly believe that, after a century of financial debauchery, the world is getting back to basics — fully backed money.
Stay with us to find more about the way this new money is born!
About DGems
DGems is a new generation fully fiat free stablecoin 100% backed by the most liquid class diamonds. The token uses a highly secure and fully transparent emission mechanism based on paranoid level disclosure and audit.
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