Bitcoin, Blockchain and the History of Money
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Bibliographic details
- Authors: HAROLD JAMES
- Published: June 1, 2018
- Volume: 55
Overview
- Author: HAROLD JAMES, professor of history and international affairs at Princeton University and IMF historian.
- Publication: F&D Magazine, June 2018.
- Central question: Is Bitcoin a plausible alternative currency? Is Bitcoin trustworthy, safe and secure?
- Context: The article examines Bitcoin and blockchain by tracing long-run monetary history and recurring patterns of innovation, suspicion, and social disruption.
Historical parallels and monetary evolution
- Money has historically combined mystical or quasi-divine narratives with sovereign authority:
- Coins commonly bore state symbols (example: Minerva’s owl for Athens; Roman emperors’ divine heads; British coins linking the monarchy to God).
- For much of the past 2,000 years, monies sat between intrinsic value and state guarantee:
- Commodity (metallic) moneys had intrinsic value but practical inconveniences (gold unsuitable for small transactions; copper problematic for large settlements).
- Metallic currencies were prone to arbitrary fluctuations from new mineral discoveries (examples: California gold in the 1840s; Alaskan, Australian, and South African fields in the 1890s).
- Absence of new discoveries in the early 19th century and in the 1870s and 1880s produced deflationary periods.
- Nonconvertible paper currencies emerged as a state-regulated alternative by the late 19th century:
- Early failures and scandals shaped distrust (examples: John Law’s early 18th century scheme; French Revolution assignats).
- Literary reflection: Goethe’s Faust links unlimited note issuance to diabolical promises.
- The 20th century featured widespread currency mismanagement (inflation during war and social turmoil, and deflation during the Great Depression).
- By the late 20th century, improved monetary policymaking achieved price stability but raised new concerns about the store-of-value function amid asset-price inflation (stock markets, real estate).
Functions of money, technology, and anonymity
- Standard economic functions: unit of account, store of value, means of payment.
- Trade-offs and logical impossibility:
- It is logically impossible to combine being a really secure store of value with providing a measure of prices that are moving in different directions for goods affecting different groups.
- Technological shifts:
- Electronic transfers replaced paper money for many transactions and are convenient, but they are easily trackable.
- Demand for anonymity (a return to the “coined freedom” of cash) drives interest in alternative payment technologies.
- Cultural and privacy drivers:
- Physical money is associated with privacy and individual freedom (cited Dostoyevsky’s “coined freedom” from The House of the Dead).
Bitcoin and blockchain: characteristics and implications
- Origins and timing:
- Bitcoin originated around the time of the global financial crisis, in 2008–09.
- The ostensible founder, Satoshi Nakamoto, is cryptically named and may not exist, fitting historical patterns of mysterious monetary origins.
- Technical proposition:
- Blockchain (distributed ledger) promises absolute transaction security without a central authority or bank arbitrator.
- It offers the potential to replace electronic bank-account currency as electronic transfers replaced paper money and as paper money succeeded gold and silver.
- Political and ideological appeal:
- Libertarians see Bitcoin as a way to shrink state power.
- Pariah states such as Venezuela and North Korea see it as a means to build an alternative to the international political order.
- Economic analogy and production of value:
- Bitcoin is analogized to gold: it can be “mined” through effort requiring large amounts of computer power and cheap energy in remote locations (examples: parts of Asia, Iceland).
- This shifts the conception of fundamental value from human labor added to nature to a combination of stored energy and nonhuman intelligence.
- The article suggests blockchain may point toward an era where value is increasingly created by nonhuman interactions of machines and energy.
- Psychological and cultural resonance:
- Bitcoin’s combination of claimed anonymity, untraceability, and security rekindles historical associations of new money with mystical or diabolical qualities.
Key findings and implications
- Recurring pattern: monetary innovation often provokes suspicion and narratives about diabolical origins.
- Technology alone does not resolve core monetary trade-offs (unit of account vs. store of value vs. means of payment).
- Privacy concerns and desire for anonymity are significant drivers of demand for alternatives to tracked electronic money.
- Bitcoin’s technical design and origin story align it with historical precedents of contested, innovative monies that attract both utopian supporters and deep distrust.
Harold James, Bitcoin, Blockchain and the History of Money — F&D Magazine, June 2018.
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