You have something I want. Let’s say it’s an egg. I ask you what you it costs. You happen to notice that I have an apple and you offer to give me the egg for my apple. This is a trade. We’re dealing with perishable goods here so we better be fast or the food will rot. And what if the apple is big and a rare sort, surely it’s worth more than one egg. Two eggs at least for such an apple. Trade gets complicated fast.
Things get easier if we use money, which is a medium of exchange. Whatever we use as money is called currency. Currency only works if we both recognise its value. Currency is a social construct. The acceptance of any currency can be plotted on a population scale, from two people to all people. We could make a currency which only you and I accept, a secret currency. If a currency is accepted by everyone in a country then it’s a national currency.
The acceptance of a currency can stretch beyond a country’s borders. The euro is a transnational currency accepted by millions. A transnational currency makes trade and migration easy. It may be possible to have an international supercurrency, one which supplants all others.
Now, I will tell you how to create currency. All you have to do is follow my seven laws. I believe these principles hold the key to successful currency.
A currency can only be accepted if it’s trusted. That’s the first law. Currency must be guaranteed by an authority. The purity of gold coins was guaranteed by the monarch. The state guaranteed their value, so people trusted them. This only works if your currency is hard to forge. Paper notes are printed on complex machines with complex designs: watermarks, special inks, special paper. Notes are contracts of trust between the authority and the user.
The second law of currency says that the stability of a currency is directly proportional to the stability of its central authority. The Swiss franc is stable because the Swiss government is stable. If a government undermines its stability by indulging in corruption, totalitarianism or war, the value of its currency will reflect that.
In order to serve stability, currencies must be hard to get. That’s law number three. Pebbles wouldn’t be good currency because I can go down to the beach and quickly become a rich man. Gold is better because it takes time and effort to mine. National currencies are created by a central bank and are tightly controlled by the government. Dollars are impossible to legitimately get except through labour. How many dollars I get for how much labour depends on the value of the dollar. We get the value of a currency by comparing it to other currencies. This is the rate of exchange and it cannot exist if there is only one currency. The value of a currency increases or decreases because of economic and social changes within the country. Most currencies decrease in value over time. This is inflation. Inflation is unpredictable because politics and trade are (Galbraith, 1976).
Law number four says that currency has no inherent value. It must be useless. Paper notes can’t be used for anything other than money. Currency must be useless to stay flexible. Its true worth as an object must approach zero. This is what makes currency a poor long term investment. If I want to hold on to money for twenty years I’m better off investing it in something which has practical value. I’m better off buying a farm, a house, a stock, than I am leaving the money in my savings account. Farms and houses have inherent value, stocks are small pieces of real companies which produce real objects (Buffett and Loomis, 2014). If I buy a house it has true value because I can live in it. These things are investments, not currencies, since currencies are basically worthless.
The object used as currency must be durable. Law number five says so. Nobody wants to end up holding money which, because of damage, has lost its value. Some countries make plastic notes which are tearproof, fireproof, waterproof. Most currency does not exist as an object anymore. It exists only as data. Banks don’t have mountains of notes under the floorboards, they have servers. In the digital age, currency is no longer metal or paper, it is information. Digital currency is everythingproof because the information can be copied an infinite number of times.
The sixth law of currency says that currency must be convenient to use. Paper money supplanted gold because it’s easier to carry around. Bank cards and cheques supplant paper money because they guarantee that the user can pay as much as they have in their account, or as much as their bank is willing to lend them. Digital technologies are convenient but not without real trade- offs. Smartphones, unlike cards, must be charged and connected to the internet. The user must be computer literate and must be able to buy the device. This excludes large parts of the world.
The seventh and final law of currency says that currency must capture the imagination. A new currency is an idea, a meme. Some memes survive and reproduce, others die. Currency can only reproduce if it follows the seventh law. It must become popular, it must trend. Gold is not a convenient currency, but the reason gold is still respected is because gold captures the imagination. Gold is a beautiful metal. Gold is part of our collective culture. Gold is what dragons guard and what adventurers seek. In video games you earn gold coins and open gold chests. Your currency must have this same intangible attraction.
Let me show you how my laws apply to a new currency: bitcoin. Bitcoin happens to be a technocurrency. The technology doesn’t matter, so long currency follows the law of convenience.
Bitcoin is not guaranteed by a central bank, it’s guaranteed by the blockchain. Everyone can see all the money in existence and what’s done with it. It’s trusted not because of central control, but because of collective control and openness (Nakamoto, 2018). It passes the first law, the law of trust. This is also bitcoin’s weakness. Since it’s new, freely tradable and freely mineable, it is highly volatile, it behaves like a high risk stock with no inherent value. It’s highly popular with speculators, something that annoys believers: those who see bitcoin as the true supercurrency. Because of its volatility bitcoin fails the second law, the law of stability.
Bitcoin is hard to get. Bitcoin must be mined, like gold. You mine coin by using powerful computers to solve maths problems. Over time bitcoin becomes harder and harder to mine. The mining mechanism is the same mechanism via which transactions are legitimised by the blockchain. This is an elegant solution to two problems. Its rarity lets it pass the third law.
Bitcoin passes the fourth law because the maths problems are cryptography problems, they have no inherent value. Bitcoin, as an object, is completely useless.
Since bitcoin is pure data, a true information currency, and since this data lives on the computer of every bitcoin user, bitcoin is highly durable, it passes the fifth law. Bitcoin is as convenient to use as computers, laptops and smartphones. In countries where people already bank electronically, bitcoin passes the sixth law, the law of convenience. In the rest of the world however, cash is more convenient than bitcoin.
Bitcoin is popular because it captures the imagination. It’s not just a new currency but a new kind of currency. There are other cryptocurrencies but bitcoin was the first. The logo looks like a gold coin and it has a symbol, a B with two lines which looks like the dollar symbol. The word cryptocurrency and the word bitcoin sound good. Most people don’t understand the technology, it’s futuristic and mysterious. The blockchain claims that it is democratic, it promises currency utopia: no central authority, international, technological. Bitcoin is the perfect 21st century meme. Bitcoin captures the imagination, it passes the seventh law.
New technologies do not replace old technologies. Gold is still valuable. Paper money is still valuable. Their popularity has not been seriously reduced by digital competitors or supercurrency wannabes. It’s unlikely that bitcoin will replace them. Anyway, bitcoin mining uses more energy than Austria, which makes its use, in the face of disastrous climate change, foolish (Urwin, 2018). Government currencies are not going anywhere anytime soon.
If you want to create a successful currency you must follow the above laws. The easier way is to found a country. The harder way is to start a cryptocurrency.
Buffett, Warren and Loomis, Carol. Tap dancing to work: Warren Buffett on practically everything. London: Portfolio Penguin, 2014.
Galbraith, John Kenneth. The Affluent Society. Boston: Houghton Mifflin, 1976.
Nakamoto, Satoshi. Bitcoin: A Peer-to-Peer Electronic Cash System. Accessed on https://bitcoin.org/bitcoin.pdf, 29 Oct 2018.
Urwin, Rosamund. Mining for bitcoin “uses more energy than Austria”, says PwC’s Alex de Vries. The Times, 5 Aug 2018.