The (Relevant) History of Money and Economics

…although that scheme for arranging for a system of money with ideal qualities would work well…it would be politically difficult to arrive at the implementation of such a system.~Ideal Money

The history of money and the technological evolutions that created different market systems is incredibly complex and therefore difficult to causally understand. There are however a few key peoples and points that we can highlight in order to better understand how the advent of bitcoin might effect the global economy and each individual in it.

In his essay Shelling Out: The Origins of Money Nick Szabo shows how proto-money could have evolved through what I have dubbed “The Kula Ring conjecture”. Nick’s observations are significant because it shows the relation of money to the specific economic conditions it is native to (such an observation might have other implications too!).

The “Kula Ring conjecture” shows that money COULD arise from a coincidence of wants. In the case of the island chain known as the Kula Ring, a phenomenon of a counter rotating circulation of specific items (necklaces and armshells) arises as the last island in the circle participates solely with the value added from completing the “ring”.

Adam Smith too, left us with a treatise on the origins of our economic history called An Inquiry into the Nature and Causes of the Wealth of Nations. It is in the present day time that Szabo re-levates the important thesis of Smith’s which is that the division of labor is the basis true value of our economic evolution. Szabo also lays down the foundation for the formalization of Smith:

…the division of labor (and thus value of an economy) increases with the extent of the market, and the extent of the market is heavily influenced by transportation costs (as he extensively discussed in his Wealth of Nations).

Szabo’s observations on Smith’s works are game changing because they seamlessly bridge economic theory with software.

The last key pieces of relevant history were mostly highlighted and discussed by John Nash in his lecture series “Ideal Money” Nash points out different key stable periods in our economic history such as when Isaac Newton pegged the British Pound to Gold in 1717.  The relevance of this in relation to our history is great, but its importance is highlighted further when understood in relation to the Bretton-Woods system which emerged from WII:

The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate by tying its currency to gold and the ability of the IMF to bridge temporary imbalances of payments. Also, there was a need to address the lack of cooperation among other countries and to prevent competitive devaluation of the currencies as well.

This system was meant to be created and implemented BEFORE the end of the war.  It is thought that we had already learned the dangers of not having an economic plan ready for the “rebuilding period” that followed WWI since negotiating and cooperating before the end of the war might be more easily achieved between “allies”.

Unfortunately (for us) the system, like all the standards before it, could not hold.  Eventually the system gave way to “political pressure” largely through what is known as the Nixon Shock:

While Nixon’s actions did not formally abolish the existing Bretton Woods system of international financial exchange, the suspension of one of its key components effectively rendered the Bretton Woods system inoperable. While Nixon publicly stated his intention to resume direct convertibility of the dollar after reforms to the Bretton Woods system had been implemented, all attempts at reform proved unsuccessful. By 1973, the Bretton Woods system was replaced de facto by a regime based on freely floatingfiat currencies that remains in place to the present day.

Looking at the history of money, it seems we are in great need of some form of an unbreakable, politically incorruptible, standard for economic consensus.

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