Helen Gurley
Brown once said, “Money, if it doesn’t bring you happiness, will at least help
you be miserable in comfort.” Money, cash, currency – these things are all
integral to our daily lives, and yet we don’t always know what makes it so.
Common tales involve it being an improvement on simple bartering, but
archaeologists have taken this myth to town – originally, humanity simply
worked on gifts and debts. Yet around the world we all started using commodity
money.
In 3000BC, the
Mesopotamians used the shekel – the weight of 160 grains of barley. In the
America’s, Asia, Australia and Africa, the use of shell money was prevalent –
using the shells of the cowry, a type of sea snail. The Lydians (ancient Turks)
were the first to introduce gold and silver coins, around 650 to 600 BC.
Eventually this system of commodity currency would develop into representative
currency, as bank would store the commodity, and the receipts would function as
‘notes.’ This system first started during the Song dynasty in China, and would
later spread to Europe after a chapter in Marco Polo’s book, The Travels of
Marco Polo, entitled ‘How the Great Kaan
Causeth the Bark of Trees, Made Into Something Like Paper, to Pass for Money
All Over his Country’ became widely read.
During the 17th
to 19th centuries, paper currency slowly replaced gold coins as a
representative currency, and before long, use of actual gold was discouraged.
Most currencies were pegged to gold. After World War II and the Bretton Woods
conference, currencies were instead pegged to the US Dollar, which was pegged
to gold, given that the US had the greatest gold reserves in the world. But the
oil crisis of 1971 resulted in Richard Nixon abandoning the gold standard, and
since then, paper money was backed by law only. In particular, governments
impose taxes, which are only payable in legal tender, creating demand for that
currency.
Why do we find
money so useful, then? When William Stanley Jevons analysed the reasons back in
1875, he found four functions, elegantly summarized as “Money’s a matter of
functions four. A Medium, a Measure, a Standard, a Store.” Modern economists
now consider only three functions, however – a medium of exchange, a unit of
account, and a store of value.
We can
immediately recognize the value of money as a medium of exchange. Without it,
we’d have to barter, and to buy something at the supermarket, you’d have to
have something the supermarket wanted as well. Money thus functions as an
intermediary – you can give the supermarket money, and they can exchange that
for what they need from someone else.
Its function as
a store of value is also quite recognizable – you can save money to use later!
Here, of course, is where the problem of inflation creeps in. However,
inflation can usually be countered by saving money where it bears interest – if
the interest paid is greater than inflation, your money holds its value. It is
why money fails in a hyperinflationary economy, like that of Zimbabwe a few
years ago. It fails as a medium of exchange when you cannot be certain that the
money you received can be counted on to be the same value later, when you want
to use it.
Finally, money
is a unit of account – without money, accounting could not exist! It allows you
to accurately measure your income and expenses, and make sure you don’t spend
more than you’ve earned, as all expenses (or goods and services consumed) can
be tracked with their prices over periods of time. It allows us to borrow
money, purchase houses, and pay it off over time. And, of course, this is how
government imposes taxes.
Recently,
however, there has emerged a new form of currency – cryptocurrency. Usually
identified as the ‘coin’ that started this new trend, Bitcoin, it uses a
technology known as a blockchain. Essentially, this relies on an open, public
and encrypted ledger that verifies transactions based on computations done by
volunteer networks of computers across the globe. These charge transaction fees
for transactions verified, while also attempting to ‘mine’ new coins by
discovering the relevant cryptographic keys.
The technology
is quite innovative, and presents many solution for disparate transaction
systems, but its proponents are arguing that it has the potential to replace
our other forms of money. But does it provide the same functions as money? As a
medium of exchange, it’s certainly making inroads – worldwide, many businesses
already accept bitcoin, and with its recent popularity, that number is certain
to rise.
As a store of
value, however… A year ago, a bitcoin was worth 942 USD, and in December 2017
it peaked at USD 19500. At time of writing, it has been hovering between USD
6000 and USD 9500 just over the last week. It does not seem to be quite stable
and is thus unlikely to function as a store of value. As a unit of account –
well, given its unstable value, it remains unlikely to be able to be used as a
unit of account by person or companies, and I believe that until a government
start accepting bitcoin to pay taxes, that will remain so for the foreseeable
future.
In Namibia, this
is actually a moot point. The Bank of Namibia has released a Position Paper
back in September 2017 that stipulated that there is no legal provision for the
establishment of virtual currency exchanges in Namibia, and stated that it is
not legal tender in Namibia. Bitcoin has become quite popular due to its rapid
rise in value, with many ‘investing’ in bitcoin, but it should be remembered that
as it currently stands, it is not money – it is a speculative investment. With
no wealth created by itself, it rather transfers wealth with the changes in its
value – it’s a zero-sum game. So while you can make lots of money quickly, it
is also possible to lose it rather quickly as well, as the last month’s price
fluctuations have shown. In the end, the only way to really become rich is
slowly, with blood, sweat and tears.
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