Do cryptocurrencies like Bitcoin (BTC) belong in monetary history?
History shows that money follows economic innovations. The distribution of new forms of money over time involves shaking up economic and financial balances and, ultimately, society as a whole. There is little doubt that the monetary system hasn’t seen this level of digital innovation before the advent of cryptocurrency. With cryptocurrencies now part of the monetary evolution, we see new ways to go about payments, consumption and savings emerge.
The inexorable destiny of currencies: technological evolution
Technological developments and currencies
Our premise here will be to consider currency as the result of applying innovations to the monetary system. Currency is therefore not a product of political change, but the normal result of economic transformation. In the times of the first civilizations, the goods available were mainly things like cattle or grain, which could be bartered one for another as a form of currency. In fact, even before the appearance of minted coins under Croesus, debt had already increased the number of exchanges.
Under Croesus in the 6th century BC, in Lydia, the appearance of standardized coins was made possible by the improvement of gold and silver processing (separation of gold and silver, mainly using salt). It should be noted that attempts to standardize metals had already taken place under the great-grandfather of Croesus.
A major monetary development happened in the 11th century, with paper banknotes appearing in China. The banknotes also came to Europe with the first crusades. Nevertheless, it was only after the invention of printing and especially its improvement that the more widespread distribution of banknotes occurred in the 17th century.
History of banknotes
The first central banks appeared in the 17th century (Bank of Amsterdam in 1609, Bank of Stockholm in 1658, Bank of England in 1694). These in particular dealt with bills of exchange, certificates, and banknotes.
Banknotes were the last major monetary innovation before digitalisation. They give us a clear overview of the changes brought about by adopting different methods of payment and saving money. In September 1701, confronted with state deficit and the need for financing the War of the Spanish Succession, Louis XIV decided to issue banknotes in the face of insufficient metal available for reminting old coins. Short-term notes with an interest of 5% to 7.5% were thus offered for 1/3 of the amount deposited. The amount of banknotes issued rose rapidly from 3.3 million livres in 1703 to 160 million in 1706.
The first notes were thus similar to public debt, which the state got into to repay at a fixed date. Treasury bills served as a means of payment, which is still the case among commercial banks today. In 1715, the amount of banknotes payable to the state added up to more than 700 million livres, between 30% and 50% of the national wealth of the time.
The history of banknotes accelerated again a few years later, under a financier John Law of Lauriston. The British financier was in charge of the new Banque Royale. In April 1719, John Law, leading this first French central bank, promised the non-devaluation of the notes issued. But in less than 12 months, Banque Royale issued nearly 1 billion banknotes and up to 2.6 billion Louis banknotes in July 1720. The financial system collapsed.
As mentioned above, metals were partially used before their standardisation under Croesus. Likewise, banknotes were used before their standardisation under the first central banks. Cryptocurrencies follow much of the same logic. Digital money has been in use for several decades now, but no attempt at standardisation, i.e. a total fusion of digital and money, has been made before cryptocurrencies.
In reality, all new forms of currency, from metal to banknotes to various commodities, are generally very speculative in the beginning, as diffusion volatility is initially high. Cryptocurrencies go beyond the digitisation of money, as they embed digital into the very functioning of money.
Central banks are showing a keen interest in cryptocurrencies, and stablecoins seem to offer a great alternative to the low efficiency of traditional currencies. Cryptocurrencies are faster, more secure and offer a greater choice of functions. They generate productivity gains.
The birth of a new economic and social world
Change in consumption, savings and payment methods
The appearance of the first coins during the reign of Croesus changed the course of civilization. Ancient Greece developed with the distribution of currency, which undoubtedly helped to create democracy. Likewise, the power of Rome lasted nearly 1,000 years because of the (relative) stability of its currency. At the end of the Middle Ages, the spread of banknotes led to the birth of capitalism and the first societies, the spread of credit and the lifestyles we all know.
There is little doubt that the world is accelerating in its race towards digitalisation. It is accelerating in terms of communication, decision making and overall decentralisation of the financial system. We are moving towards a world where everyone is their own banker, their own doctor, their own boss, etc.
Cryptocurrencies, from central banks or not, profoundly modify the previous monetary balances. Patterns of savings are already changing. Much like the first notes that offered interest, the simple act of holding cryptocurrencies now offers returns. This changes the way people save and the digitalisation of money encourages the merge of the current account and the investment account. That means that the link between savings and consumption becomes even stronger with cryptocurrencies (a fall of one implies a systematic fall of the other).
Consumption patterns should not be spared in the coming years. Current monetary changes encourage high speed of transactions, and especially their independence (with very few intermediaries).
Towards crises of a new type?
We can imagine a world in which digital currency is at its peak. The recurrence of crises is likely to be faster, but for a different reason. Crises have various origins: the unsustainability of debt or the financial system, slower growth, the collapse of currencies, etc.
The underlying idea behind cryptocurrencies is to encourage free monetary competition. To a certain extent, such a system protects against the risks of failure of the interbank system if banks use their own currencies. According to Friedrich Hayek, the appearance of a money market would promote monetary flexibility (devaluation or overvaluation of currencies depending on the risk of defects, choice of players towards the most stable currencies, etc.). The idea of central banks moving towards single, centralized cryptocurrencies is therefore irrelevant.
The crises of the world of tomorrow, if governments don’t continue their authoritarian logic, will probably be faster and more globalized, but also more traceable with simultaneous effects on savings and consumption. The fact of mixing savings and consumption through the digitalisation of money inevitably encourages the disappearance of the Keynesian model, that is to say the effectiveness of stimulus and public spending. The world of tomorrow will depend a little more on production. The interdependence between changes in savings and changes in consumption may also increase.
Ultimately, cryptocurrencies are part of a major monetary innovation. They are the perfected attempt to digitise money that we have known since the turn of the century. Just like banknotes or coins, the spread of cryptocurrencies generates speculative practices and the need for improvement persists. The distribution of digital currencies has a role in the modification of the balance between consumption, savings, and payments. The digitalisation of money therefore appears to be a natural development with the equipment available, leading to the recurrence of new types of crises and exchanges.
Author of various books, financial and economics editor for many websites, I have been forming a true passion for the analysis and study of markets and the economy.