## LUCRE’S ALLURE

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### Money, technology, and trust
- Money is central to human relationships: we exchange it but find it hard to explain where it comes from or why others accept it.
- Monetary disruptions—inflation or deflation—lead to widespread social disruption.
- New technologies increase suspicion because innovation highlights the risks in monetary exchange and the need for stories about origins.
- Electronic money is convenient and easily trackable; part of the demand for new technology stems from privacy concerns and a wish to regain the anonymity of cash transactions.
- Fyodor Dostoyevsky’s phrase “coined freedom” is used to capture the psychological value of physical money.

### Historical patterns of currency innovation
- Traditionally, money was almost always an expression of sovereignty; private currencies were very rare.
- Coins historically bore state symbols (example: Minerva’s owl for Athens; Roman emperors’ divine heads; British coins linking monarchy to God).
- For much of the past 2,000 years, moneys were ambiguously positioned between intrinsic value and a state guarantee of acceptance.
- Commodity moneys (metallic) had intrinsic value but practical inconveniences: gold coins unsuitable for small daily transactions; copper problematic for settlement of large accounts.
- Metallic currencies were prone to arbitrary fluctuations driven by new mineral discoveries:
  - Discovery of California gold in the 1840s, and later the Alaskan, Australian, and South African fields that opened up in the 1890s, produced benign and mild inflation.
  - The absence of new discoveries in the early 19th century and then again in the 1870s and 1880s was deflationary and depressing.

### Paper money and the legacy of mismanagement
- By the late 19th century, economists considered nonconvertible paper currencies—without link to precious metals—regulated by the state as potentially offering a more stable store of value.
- Historical episodes of disastrous paper-money innovation:
  - Early 18th century: Scottish financier John Law’s scheme for a currency backed by a general company, which operated like a pyramid scheme and collapsed in chaos.
  - French Revolution: assignats issued against confiscated land; overissuance produced new inflation.
  - Literary framing: Goethe’s Faust links paper-money creation to the devil, quoting “Wise men will, when they have studied it, place infinite trust in what is infinite.”
- Most of the 20th century saw destructive experiences with mismanagement: inflation during war and its aftermath, social turmoil in the 1960s and 1970s, and deflation of the Great Depression.
- It took a long time for government to learn how to handle money properly.

### 20th century onward: price stability, asset inflation, and anonymity
- By the late 20th century, improved monetary policymaking in most countries largely solved price stability.
- New problems emerged: the store-of-value function looked problematic when consumer-price stability coincided with dramatic inflation of some asset prices (stock markets, real estate).
- Replacement of paper currency with electronic transfers brought debate over privacy and anonymity; vigorous campaigns in many countries have sought to preserve coins and notes.

### Bitcoin as a 21st-century analogue of gold
- Bitcoin originated around the time of the global financial crisis, in 2008–09.
- The ostensible founder, the cryptically named Satoshi Nakamoto, may not exist; Bitcoin fits the historical pattern of currencies with mysterious origins.
- Bitcoin’s attractiveness rests on its claim to combine anonymity and untraceability with security via distributed ledger (blockchain) technology, which promises absolute security without a central authority.
- Analogy with gold:
  - Bitcoin can be created or mined through effort; creators established an analogy with gold: extracting gold required human exertion, Bitcoin requires large amounts of computer power driven by cheap energy in remote areas of Asia or in Iceland.
  - Blockchain technology reframes value as a combination of stored energy and intelligence, none of it human, suggesting a shift in perception of fundamental value.
- Political and ideological implications:
  - Libertarians celebrate Bitcoin as a way of shrinking state power.
  - Pariah states such as Venezuela and North Korea see it as a way of building an alternative to the international political order.
- The fear that innovation in money is diabolical and associated with instability has reappeared with Bitcoin.

*Harold James, June 2018 — FINANCE & DEVELOPMENT*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2018/june/james.pdf_