Evolution of Monetary Functions in the Context of Their Specialization
Evolution of Monetary Functions in the Context of Their Specialization
In our previous article, we examined in detail the history of the emergence of money and the evolution of monetary relations. We discussed the gradual abstraction of the measurement of value, moving from a physical medium (material carrier) into pure information expressing value.
We actually concentrated mostly on the first function of money (measurement of value). Therefore, in this study, we would like to consider in more detail the issue of the evolution of money functions directly.
Today economists allocate many functions to money. However, we’ll concentrate on the three main ones, namely:
1. Measurement of value
As we discovered in our previous study, the value is an abstract concept that only exists in the context of a specific historical and economic framework, and is closely associated with human activity and perception (or rather, that of a human community or even communities). The practical function of value is the adoption of a common criterion for evaluating, measuring, and comparing the usefulness (in the broad sense) of all goods and services in relation to one another. Money, in this context, serves as a sort of conditional unit — a measure of value. Exploiting this function of money allowed humans to escape from the pre-monetary barter system, and also contributed to the development of economic relations. Its appearance enabled the evaluation and comparison of the practical utility of any goods and services and therefore allowed us to build various models of economic interaction on this basis.
2. Means of circulation / payment / settlement
In an everyday setting, money is used as a helpful intermediary for the practical circulation of goods (buying, selling, exchanging, etc.). To do this, money, or rather its tangible carrier (medium) must have a number of properties and characteristics, namely:
- Liquidity, i.e. the ease and speed with which money can be exchanged for goods and vice versa;
- Fungibility, the property of individual units being essentially interchangeable. For example, one coin must be identical to any other — principally in terms of expressed value;
- Durability, the ability to withstand continual use;
- Portability, the ability to be carried and transported easily;
- Cognizability, the ability of the face value to be easily identified;
- Stability (or low volatility), i.e. a low fluctuation of the relative value (ideally).
3. Store of value
Funds accumulated, but not used (temporarily taken out of circulation), allow the transfer of purchasing power from the present to the future. This also enables accumulation of funds for making larger acquisitions or investments, or savings transfer (for example, to the next generations), etc. To effectively implement this function, money must have the following properties:
- Can reliably be stored for long periods;
- Can be removed from storage fairly easily;
- Has predictable liquidity (ease of practical use) after removal from storage;
- The value of money, to be suitable for accumulation, must retain stability (or even increase) in value over a long term.
From the above, it is clear that the requirements for the properties and physical characteristics of the cash carrier (medium) of the second and the third functions of money are quite specific; in fact, here we are discussing what we would today call utility. Moreover, for each function, the requirements for these characteristics are quite specific.
Meanwhile, the first function of money has no special requirements for the carrier, other than the essential property of storing information about the value it expresses. Therefore, the first function is easier to abstract, which we talked about in detail earlier.
Thus, different forms of money (the evolution of which we discussed in detail in the previous article) may carry different sets of functions. In other words, they can both perform all the functions or just some of them; they can even specialize in one of them. Moreover, all of this (that is, the set of functions that a particular monetary form performs) may also change over time.
So, let’s consider this in more detail.
After the transition from barter (a cashless system) to commodity money, mankind had, as a rule, more than one type of money. Many different types of money existed, in the form of goods of varying appropriateness for performing monetary functions. And exactly this variety actually contributed to their greater specialization (greater, that is, when compared with the situation to which most modern people are accustomed).
So cattle was more suitable for the first money function (as a measure of value) and, to a lesser extent, the second function (as a means of payment). Salt was suitable for both the first two functions (even more so than cattle, albeit only in cases of what we now call micropayments), and the third function (accumulation), and so on. Some goods were more convenient to accumulate or transport, some had more liquidity or fungibility, some goods were more durable or were better suited for division into smaller parts (while some others, such as livestock, were not suited for it at all), and so on.
With the transition to metal coins, there came a relative centralization and consolidation of monetary functions into a single medium. Coins made of precious metals very successfully (as much as possible for that level of civilizations’ technological development) combined most (if not all) of the characteristics necessary to perform all three basic functions of money.
It can be argued that during the reign of coins made of precious metals, the centralization of the functions of money in one medium reached its peak. However, with the progress of civilization, the development of monetary relations and resultant development of monetary carriers, we can observe a process of gradual specialization.
So, after the abolition of the Gold Standard from the 1950s to 1970s, national currencies of most countries switched to fiat money; a monetary system based on the trust in the issuer of a currency. Actually, the transition to fiat was due to the objective economic necessity of providing the economy with more money that could be provided using a scarce resource, such as gold. This was due to the need for credit, to increase the total money supply, etc.
But the potentially unlimited emission, as well as human influence in the manner of monetary policy over fiat money regulation, has led to fiat money becoming greatly subject to the inflation effect. By inflation we mean the gradual rise in prices for goods and services, which is essentially connected with a decrease in purchasing power of monetary units as a consequence of an increase in their number (in this case, as a result of the issuance of additional money supply).
All of this has led, therefore, to fiat money becoming less suitable to fully perform the third function of the accumulation of value. However, it continues to perform the role of a measure of value, and especially the function of a means of settlement and payment. For that latter function, fiat paper (and later fiat electronic) money is much more suitable than metal coins.
Thus, we can observe here the process of inverse centralization of the functions of money: specialization.
During this period of the unchallenged dominance of fiat money, the third function of money hasn’t disappeared. It’s passed to (or, more precisely, remained with) precious metals — gold, silver, and platinum. It’s not by chance that those are actually called the “bank” metals).
This situation persists to this day, more or less. However, with the advent of blockchain technologies and cryptocurrencies over the past decade, further specializations have become possible. Although these innovations are still in their infancy, they have already gone through several stages of their own evolution. So we can already speculate a little on what could be waiting for us in the near (or not-so-distant) future.
Future: Store of value
It’s unlikely we will be able to bypass fiat money as a measure of value in the immediate future, for a number of reasons. First of all, because traditional cryptocurrencies are inherently unable to regulate their money supply depending on economic circumstances — in fact, if cryptocurrencies could do this, they would be little different from fiat electronic money.
At the same time, cryptocurrencies (especially Bitcoin, at least for the time being) seem to be able to claim the function of a means of accumulation. Bitcoin is increasingly referred to as “digital gold”, due to holding the greatest market adoption among all existing cryptocurrencies. All other cryptocurrencies and tokens are de-facto denominated in bitcoins (since the absolute majority of them do not have a direct conversion to fiat). There’s also the clear limitation on its max supply, and regulated emission until it reaches that cap — Bitcoin being a digital scarcity, as we have discussed before.
At the 2018 Upfront Summit, Fundstrat Global’s co-founder Thomas Lee described Bitcoin as the Holy Grail of portfolio allocation, citing the ever-decreasing correlation of its price with stock and bond market fluctuations and an inverse relationship with the price of gold.
One can also look at practical examples of countries such as Venezuela, where the government’s monetary policy has led to an inflation forecast from the IMF of 1,000,000%for December 2018. As a result, Venezuelans have turned to Bitcoin and Dash as viable alternatives to the national currency — primarily for means of value preservation, but also to use as a vehicle for payments.
However, it turns out that Bitcoin is not the ideal solution as a mean of payment due to certain technological and ideological limitations. Bitcoin transactions are quite slow, and with the increase in its price are no longer as cheap (unless employing a third-party layer 2 solutions, aimed for transaction price optimization).
All this suggests that Bitcoin (like similar cryptocurrencies) may not be the best candidate for the first two functions of money. But in the future, it may well take its place as the main, or at least a major, means of storing value (the third function).
To date, this possibility has been hampered, largely by the excessive volatility of the crypto market in general and Bitcoin in particular. But that’s most likely a consequence of the immaturity of this market and technology, the (still) low level of market acceptance, the lack of integration into real economic and business processes, an excessive concentration of crypto assets, as well as their mining capacities, and so on. But after these and other challenges are overcome, our prediction may well become a reality.
Future: Means of circulation
Thanks to technological development, the future of any means of circulation function will most likely involve an inability to circulate anything. Custodians will be able to store or account for our assets; only digital liabilities, backed up by these assets, will circulate. Such a system will permit exchange via mere record-keeping of transactions and clearance, without the redundant transfer of actual goods and assets.
Thus, it won’t be a single asset (like cryptocurrency or fiat money) that acts as a mean of circulation, but rather a set of rules that regulate such circulation. In other words — a protocol.
In the last article, we mentioned our project, (GEO Protocol), although we did not describe it in depth. Now seems an appropriate time to do so, at least in general terms. The idea of GEO Protocol is simply to overcome the limitations of all existing and prospective blockchain-based projects and cryptocurrencies, as well as other digital assets; to create a system capable of combining them, and of connecting them to the systems and assets of the real world economy.
This will be done not only by enabling the possibility of circulating cryptocurrency and fiat assets in one system but also by facilitating the digitization of any physical assets in the form of digital liabilities (IOUs) or equivalents, (called cross-units in GEO Protocol).
In essence, the task is to create a universal protocol for value transfer within the so-called Internet of Value. Just as, for example, TCP/IP became a decentralized protocol for transferring information between individual computers, and different local area networks, giving rise to the global information network — the Internet.
It’s precisely this problem we intend to solve with GEO Protocol. In fact, its goal is to become the most perfect system for the realization of the second main function of money — the means of circulation.
Future: Measure of value
But let us return to the function of value measurement. As we stated above, in the near future we are unlikely to see the global economy nor leading national economies depart from fiat money as a means of value measurement. Of course, the form of this type of money can change, becoming more or even exclusively electronic (as is already happening). But the essence of fiat currency — regulation of emission and monetary policy of central banks (or their analogs) — is unlikely to disappear soon. For us to witness this, the whole world as we know it, and the global economy, would have to change beyond recognition; and this would require time at the very least, even before considering the substantial — perhaps even catastrophic — catalysts that would be necessary.
However, speaking more generally, a change in the means of value measurement is at least theoretically possible. If you decouple value measurement from the concept of currency, then you can fully use any relatively stable asset for that purpose — even “exotic” units such as a kilowatt of energy, for instance.
Energy is a kind of universal equivalent indeed, since the creation, functioning, and even consumption of any commodity requires energy; it is used everywhere. The need for energy will not end as long as humanity, or something created by it, is around.
Of course, energy can’t act as a measure of value in its natural form, but rather only as a digital equivalent. By the way, this equivalence (a cross-unit, as we mentioned) can also be created on the GEO Protocol network.
Conclusion
As we see, the logic of the development of monetary functions forms a kind of upward spiral:
- In the early stages of the development of monetary relations, the three main functions were distributed among several types of money (with some very hazy specialization).
- In the later stages of sufficiently developed economic and monetary relations, all three main functions of money were concentrated in one medium (coins of precious metals).
- Following on, and due to the complication of these relations, we see again a tendency towards specialization, namely the separation of certain functions of money (accumulation) from the primary monetary units (fiat money) used for the first two functions (a measure of value and means of circulation).
- And finally, as a result of the development of technology, we may witness in the future a new peak of absolute specialization, wherein each function of money will find its own carrier, the properties, and characteristics of which will most fully meet the requirements for performing their respective functions.
In addition, it is possible that this deepening of specialization will continue. Namely, there will be more territorial or functional fragmentation of equivalence; certain functions of money will be performed by different units of equivalence depending on the territory or context of use.
But in one way or another, we will require some kind of distributed system, where all this decentralization would be quite convenient and effective. And, we may note, it was precise as a system of this kind that GEO Protocol was conceived.
