It didn’t take long for my kids to sing about “The Room Where It Happened” and the 1790 Compromise, thanks to Lin-Manuel Miranda. Don’t most kids rap about the trade-off between state debt and capitol placement??
Made famous by Miranda’s blockbuster musical “Hamilton,” this vignette in early American history shows the torturous and non-linear role money played in the nation’s development. On the one hand, Thomas Jefferson wanted the lonely farmer plowing a pastoral farm to be the new model, while Alexander Hamilton saw urban areas as the main engine of prosperity.
To facilitate complex transactions, Hamilton proposed a national bank to guarantee each colony’s debts incurred during the Revolution. Jefferson saw central banks as a threat to freedom. He preferred decentralized currencies to powerful monetary authorities.
Debates over currency continued throughout the 19th and early 20th centuries. The Lincoln administration attempted to unify its currency using green ink during the Civil War (hence the nickname Greenback), and the debate over gold or silver standards was led by William Jennings in his Bryan candidacy. spurred on. In 1913, the Federal Reserve Act introduced a formal central bank to the United States. Today’s debates on cryptocurrencies and blockchain continue the central debate about what money is and who maintains its supply.
Money serves three purposes. The first is the medium of exchange. In the agricultural barter system, if you grow wheat and need potatoes, you have to find a potato farmer who needs wheat. Specialization is difficult because it would require a taqueria trying to exchange goods for.
Thanks to money, legal briefs, engineering designs, and blue jeans can be converted into currency to buy what you want. Money allows workers to specialize in their talents and then trade. I write for an economic paper and I really like tacos, so I appreciate that.
Money also retains the value of labor over time. Tomato farmers couldn’t retire from a bountiful crop because they would spoil quickly, but the currency allowed them to invest in their future. Finally, money serves as a yardstick for measuring the value of goods and services across complex economies.
Banknotes and coins aren’t the only examples of items that fill all three roles. Seashells, stones, gold and other precious metals all function as currency. My grandfather used his allotted cigarettes to buy whatever he wanted because it was against his religious beliefs to smoke in a unit during World War II. In his platoon, Tobacco served all three of his purposes for money.
Today, cryptocurrencies provide a decentralized currency that can digitally cross borders and circumvent the regime. Originally, computer processing time, or “mining,” determined the number of Bitcoins a user could hold in a digital wallet. Investors can buy bitcoin on the market using their home currency. Digital currency authentication comes from a “blockchain,” a type of electronic lock and key that uses mathematical cryptography to identify individual coins. In the crypto wilds, blockchain has acted like a sheriff’s deputy in a Wells Fargo wagon.
But will cryptocurrencies play the role of traditional money? It has the potential to be a medium of exchange, but only if people are willing to accept it. If my local taqueria doesn’t trust my new currency, I have no tacos.
Economists call this phenomenon “network externalities.” This means that the value increases significantly as more people use it (which explains why Facebook was so popular while MySpace was struggling). Cryptocurrencies are also struggling as a unit of account. With so many competing currencies, it’s hard for the average consumer to know what cryptocurrency denomination they need to exchange for tacos.
Finally, as investors move from one shiny digital coin to another, the value rises and falls like a classic roller coaster, with dizzying gains and catastrophic losses. Interestingly, in countries like Argentina and Zimbabwe that suffer from extreme inflation, cryptocurrencies are more popular than their home currencies because they are more stable despite turbulence.
The boom-bust cycle of the latest Digital Gold Rush may be traced back to the hopes and dreams of the 49ers in the California Gold Rush. Unless cryptocurrencies can facilitate transactions and maintain market value, it will look more like the Dutch tulip boom than a new global currency. Cryptocurrencies may teach central banks some new tricks as they experiment with the digital dollar, but the US dollar will adapt to its limits and maintain its dominance for the foreseeable future.
Michael S. Kofoed (@mikekofoed on Twitter) is an associate professor of economics at the United States Military Academy and a researcher at the Labor Economics Institute. A native of Utah, he holds degrees in economics from Weber State University and the University of Georgia. These opinions are those of the author and do not represent the U.S. Military Academy, Department of War, or Department of Defense.
