The Blockchain Identity - Fuqua School of Businesscharvey/Teaching/697... · 2020-02-25 · Iraqi Swiss dinar • Key insight is that Iraqi Swiss dinar had no official backing yet

Why Money?Campbell R. Harvey

Duke University and NBER

FUQINTRD 697: Innovation and Cryptoventures

Campbell R. Harvey: 2020 2

Purposes

Purposes:Primary• Unit of Account: A way to compare the value of various goods and services• Medium of Exchange: Allows for non-barter transactions.

Secondary• Store of Value: Allows value to be retained – even if partially – rather than

complete decay (e.g. storing food). • Transfer of Value: Ease of transfer of value and to defer value.

3Campbell R. Harvey: 2020

Characteristics

Traditional characteristics:• Durability: Withstand repeated use (coins, paper, gold)• Portability: You can carry around• Divisibility: Fractional units• Uniformity: Versions of the same currency have identical value• Limited Supply: Unlimited supply would mean zero value• Acceptability: “This is legal tender for all debts, public and private”• Stability: If unstable, people will look for alternatives


The Communist DreamThe Principles of Communism, 1847• “Finally, when all capital, all production, all exchange have been

brought together in the hands of the nation, private property will disappear of its own accord, money will become superfluous, and production will so expand and man so change that society will be able to slough off whatever of its old economic habits may remain.”

5Campbell R. Harvey: 2020https://www.marxists.org/archive/marx/works/download/pdf/Manifesto.pdf

https://www.marxists.org/archive/marx/works/download/pdf/Manifesto.pdf

The Communist DreamA World without Money, 1975-6• “The new people will resemble their hunting and gathering ancestors

who trusted in a nature which supplied them freely and often abundantly with what they needed to live, and who had no worry for the morrow, over which in any case they had no control.”

• L'homme nouveau se rapprochera de son ancêtre chasseur collecteur qui faisait confiance à une nature fournissant gratuitement et souvent abondamment de quoi vivre, qui ne se souciait pas d'un lendemain sur lequel de toute façon il n'avait pas prise. L'homme de demain aura pour nature le monde qu'il aura façonné, l'abondance naîtra de ses propres mains. Il sera sûr de lui car il aura confiance en sa force et connaîtra ses limites. Il sera insouciant parce qu'il saura que demain lui appartient.

6Campbell R. Harvey: 2020http://www.reocities.com/demainlemonde/Un_monde_sans_argent.pdf

The Communist DreamBut…• Even North Korea uses money!


The Communist DreamFurther…• Hunter-gather life style is no easy life style• “Five years ago, members of the Nukak-Maku

unexpectedly wandered out of the Amazonian rainforest at San José del Guaviare in Colombia. The Nukak were a tribe that time forgot, cut off from the rest of humanity until this sudden emergence. Subsisting solely on the monkeys they could hunt and the fruit they could gather, they had no concept of money. Revealingly, they had no concept of the future either. These days they live in a clearing near the city…. Asked if they miss the jungle, they laugh.”

8Campbell R. Harvey: 2020Niall Ferguson, The Ascent of Money

The History of MoneyNot just coins• 3300 BC Clay tokens in Mesopotamia• “In the Mesopotamian cities, there were 16 main

types of tokens and dozens of sub categories for things like honey, trussed duck, sheep's milk, rope, garments, bread, textiles, furniture, mats, beds, perfume and metals.”

9Campbell R. Harvey: 2020http://factsanddetails.com/world/cat56/sub363/item1514.html

http://factsanddetails.com/world/cat56/sub363/item1514.html

The History of MoneyNot just coins• 2800 BC Silver ring money in

Mesopotamia• Others used tin, copper or bronze• Allowed for trade within a city and

between cities

10Campbell R. Harvey: 2020http://factsanddetails.com/world/cat56/sub363/item1514.html

http://factsanddetails.com/world/cat56/sub363/item1514.html

The History of MoneyNot just coins• 1650 BC Clay tablets in Mesopotamia• “Babylonian town of Sippar. A clay tablet found

there was inscribed with this promise: At harvest time, someone named Amil-mirrawould pay 330 measures of barley to whomever held that tablet.”

• First “promise to pay”

11Campbell R. Harvey: 2020Bitcoin: And the Future of Money, Jose Pagliery

The History of MoneyPaper money• Fiat money invented in China• ~600 AD China T’ang Dynasty “promises to pay”

(hence the term promissory notes)• First record of metallic reserves around 1000 AD,

where reserves were 3/7ths of the face value.

12Campbell R. Harvey: 2020John F. Chown, A History of Money: from AD 800

The History of MoneyEurope• Roman coinage, the silver denarii, was used well after the fall of the

Roman Empire.• However, there was a shortage of silver in Europe. Why? because of

deficits with southern Mediterranean and Near East. • Alternatives to coins arose for small amounts (like squirrel skins and

peppers)


The History of MoneyEurope• Discovery of silver in New World solved the shortage problem• 170 tons of silver heading to Castilian monarchy per year• Spanish pieces of eight used outside of Spain – so a global currency• Inflation resulted. In 100 years, the price of food increased 7X


The History of MoneyUSA• Federal Reserve Bank relatively new – set up in 1913• Until that period, essentially “free banking”• Over 30,000 banks in 1922 – many undercapitalized• 1933 deposit insurance introduced during Great Depression• Highly fragmented system; the first state to allow interstate banking - 1976


The History of MoneyRise of Banking• Late 1300s the Medici established modern banking• Banking spread to northern Europe, Amsterdam

Exchange Bank set up in 1609, resolved problems that merchants faced with multiple currencies. 100% reserve ratio. 100% commercial transactions.

• Swedish Riksbank 1656 did deposits as well as lending. Fractional reserves

• Bank of England 1694. Granted monopoly power. 1742 was able to issue promissory notes that did not bear interest. Designed to help government with financing.


The History of MoneyFractional reserves increase money• Money multiplier results because a deposit is not 100% held at a

bank, some is lent out and the person that borrows, deposits at another institution, ….

• M0 (monetary base or high power money) = total liabilities of central bank (cash plus reserves of private sector banks at the central bank)

• M1 (narrow money) = cash in circulation + demand deposits


The History of MoneyGold or commodity-based currency not necessarily a solution• Countries choose when to be on gold standard and when to abandon it• US is a good example• Illegal to hold gold from 1933 to 1971.


The History of MoneyUS in and out of gold standard


1

10

100

1,000

U.S

. GDP

Def

lato

r

Basically SilverAverage inflation rate:

-0.1%/year

Basically GoldAverage inflation rate:

1.1%/year

Fiat Paper MoneyAverage inflation rate:

-0.1%/year

True Gold StandardAverage inflation rate:

0.7%/year

Quasi-Gold StandardAverage inflation rate:

3.2%/year

Fiat MoneyAverage inflation rate:

3.7%/year

Data source: U.S. GDP deflator from Johnson and Williamson (2011). “Currency regime” labels from Elwell (2011). See Erb and Harvey (2013).

The History of MoneyGold also subject to inflation• Just as discovery of new world gold (and silver) led to high inflation,

technological change will dramatically increase the supply of gold


The History of MoneyGold also subject to inflation• Just as discovery of new world gold (and silver) led to high inflation,

technological change will dramatically increase the supply of gold


Near-earth asteroid Eros might have 125,000 mts (Science, 2009). That equals all gold ever mined on Earth.

The History of MoneyFiat currency is a bubble• US dollar, for example, has three features:

• Legal tender• Government can tax and you pay taxes in dollars• Government can incarcerate you if you do not pay tax


The History of MoneyFiat currency is a bubble• Nevertheless, any fiat currency is a bubble – the currency only has value

because people believe it is valuable• There are plenty of historical examples of when faith was lost in a

currency


The History of Money

25Campbell R. Harvey: 2020https://www.cato.org/sites/cato.org/files/pubs/pdf/hanke-krus-hyperinflation-table-may-2013.pdf

https://www.cato.org/sites/cato.org/files/pubs/pdf/hanke-krus-hyperinflation-table-may-2013.pdf

The History of MoneyCurrency can exist without government• Gold is the traditional example – but gold has uses• Cigarettes used in POW camps as medium of exchange• Other examples include cowrie shells and peacock feathers

26Campbell R. Harvey: 2020 ChinaPapua New Guinea

The History of MoneyIraqi Swiss dinar• Iraqi Swiss dinar was the currency of Iraq until the first Gulf War in 1990

(plates made in Switzerland, printed in the UK)• In 1991, Iraq was split in two with Saddam Hussein in the south the Kurds

in the north• Because of sanctions, could not import dinars so Saddam ordered the

printing of a new currency

27Campbell R. Harvey: 2020http://people.ischool.berkeley.edu/~hal/people/hal/NYTimes/2004-01-15.html

http://people.ischool.berkeley.edu/%7Ehal/people/hal/NYTimes/2004-01-15.html

The History of MoneyIraqi Swiss dinar• In May 1993, the Central Bank of Iraq announced that citizens had three

weeks to exchange old 25 dinar notes for new ones


The History of MoneyIraqi Swiss dinar• However, old Swiss Dinar continued to be used in the north.• Saddam cranked the printing press to finance regime and soon the

exchange rate was 300 Saddam dinars=1 Swiss dinar

29Campbell R. Harvey: 2020See Mervyn King, http://www.bankofengland.co.uk/archive/Documents/historicpubs/speeches/2004/speech208.pdf

http://www.bankofengland.co.uk/archive/Documents/historicpubs/speeches/2003/speech208.pdf

The History of MoneyIraqi Swiss dinar• Key insight is that Iraqi Swiss dinar had no official backing yet it was

accepted as money – because people were willing to accept it as money.• Interesting related story with the introduction of the Brazilian “unit of real

value” in 1992 when inflation was running at 80% per month.


http://www.npr.org/sections/money/2010/10/04/130329523/how-fake-money-saved-brazil

http://www.npr.org/sections/money/2010/10/04/130329523/how-fake-money-saved-brazil

Recap: History9000 BCE Barter• Market in Egypt exchanging goods, i.e. cows for sheep

32Campbell R. Harvey: 2020http://techcrunch.com/2016/01/21/barter-to-bitcoin-a-story-of-money-and-blockchain/#.yf9zg3w:id5Phttps://blog.quantinsti.com/evolution-trading-barter-system-algo-trading/

http://techcrunch.com/2016/01/21/barter-to-bitcoin-a-story-of-money-and-blockchain/#.yf9zg3w:id5P

https://blog.quantinsti.com/evolution-trading-barter-system-algo-trading/

Recap: History600 BCE Coins• In Lydia


https://lunaticg.blogspot.com/2008/10/worlds-first-coin-lydian-lion.html

https://lunaticg.blogspot.com/2008/10/worlds-first-coin-lydian-lion.html

Recap: History1290 Banknotes• Marco Polo introduces the idea to Europe (originates in China)

34Campbell R. Harvey: 2020http://www.silk-road.com/artl/papermoney.shtml

http://www.silk-road.com/artl/papermoney.shtml

Recap: History1871 e-Money• First Western Union money transfer

35

Recap: History1950 Credit Cards• First credit card is Diners Club


Recap: History1967 ATM• First ATM introduced in north London by Barclays Bank

37Campbell R. Harvey: 2020https://www.telegraph.co.uk/personal-banking/current-accounts/story-behind-worlds-first-cashpoint/

https://www.telegraph.co.uk/personal-banking/current-accounts/story-behind-worlds-first-cashpoint/

Recap: History1983 Telephone Banking• Bank of Scotland introduced Homelink which is the first application of

Internet banking

38Campbell R. Harvey: 2020https://www.finextra.com/newsarticle/25443/uks-first-online-banking-service-homelink-hits-30 and https://www.slideshare.net/jjchai/online-banking

https://www.finextra.com/newsarticle/25443/uks-first-online-banking-service-homelink-hits-30

https://www.slideshare.net/jjchai/online-banking

Recap: History1994 Internet Banking• Began to become widespread in the US. Stanford Federal Credit Union

offers Internet banking to customers


Recap: History1997 Contactless Payment• Mobil introduces Speedpass at gasoline stations (RFID device)


Recap: History2005 Chip and Pin• Introduced with credit cards


Recap: History2009 Bitcoin• Programmable money introduced by “Satoshi Nakamoto”

42Campbell R. Harvey: 2020https://www.businessinsider.com/nakamoto-misquote-2014-3

https://www.businessinsider.com/nakamoto-misquote-2014-3

Recap: History2014 Apple Pay• 40% of US retailers have capability

for contactless pay


Recap: History2020 Blockchain• All leading banks have blockchain initiatives

David Solomon, CEO Goldman Sachs: June 27, 2019• “Assume that all major financial institutions around the world are

looking at the potential of tokenization, stablecoins and frictionless payments.”


Future202? Back to Barter• Cross-blockchain trading of objects• Billions of bilateral exchange rates• Still need some way to store your wealth• Open question of whether currency – as we know it, either in fiat or

crypto, is necessary


Summary


The History of MoneyConclusion• All fiat currencies are a bubble.• Bubbles need not burst – they can be rational and long living• All non-collateralized cryptocurrencies are bubbles.• If someone dismisses a cryptocurrency saying it is a bubble, it is likely

they do not understand basic monetary economics.


The History of MoneyHighly recommended


Supplement: The History of Money


http://www.imf.org/external/pubs/ft/sdn/2016/sdn1603.pdf

http://www.imf.org/external/pubs/ft/sdn/2016/sdn1603.pdf



