The Democratization of Money

When the Continental Congress finally adopted the Declaration of Independence, they did so with the intent of freeing themselves from a despotic and tyrannical system which had been oppressing them for a looooooooong time.

Did they imagine a new, better world for themselves?

Arguably, not for themselves per se, but for their children and grandchildren at the very least. I think it goes without saying that much of the freedom they wanted was an economic freedom.

When the framers and founders formed the States did they go far enough?

They vested the power “to coin Money, regulate the Value thereof, and of foreign Coin” in the legislative branch.

Has that branch of government done a great job of regulating the value of money?

After failed attempts at national banks and other schemes, we’ve spent the last 100 years under the yoke of a pseudo-public-yet-privately-owned Federal Reserve bank, whose tenure at the helm of our finances has included more booms and busts, more volatility, and a larger decrease in the value of our money than any period in our nation’s history. If not for the dollar’s status as the world’s reserve currency, the current monetary scheme would have melted away in 2008 in a spectacular implosion somewhat like a nuclear meltdown.

Good management or not, the last 100 years have been a huge boon to wage earners. Consider the opulent lifestyle even the poorest among us has:

  • 80 percent of poor households have air conditioning. In 1970, only 36 percent of the entire U.S. population enjoyed air conditioning.
  • 92 percent of poor households have a microwave.
  • Nearly three-fourths have a car or truck, and 31 percent have two or more cars or trucks.
  • Nearly two-thirds have cable or satellite TV.
  • Two-thirds have at least one DVD player, and 70 percent have a VCR.
  • Half have a personal computer, and one in seven have two or more computers.
  • More than half of poor families with children have a video game system, such as an Xbox or PlayStation.
  • 43 percent have Internet access.
  • One-third have a wide-screen plasma or LCD TV.
  • One-fourth have a digital video recorder system, such as a TiVo.

Technical advances and industrialization have almost magically beaten the pace of inflation, giving us a lifestyle unparalleled in history. Think about how awesome it is that the poorest people in the U.S. still have air conditioning, microwaves, vehicles, cable, a computer, and internet! Yet our money has lost 98% of its value since the Fed’s creation in 1913… how much more could our lower and middle classes be prospering if our money weren’t losing value every day?

Wage earners, of whatever stripe, depend on the wages they receive, and think about that money differently than entrepreneurs or investors.

What kind of qualities should money have to attract the attention of wage earners?

The quality of money they appreciate the most is its ability to pay for the things they want and need, and secondarily as a store of value. Those are the two qualities required of a currency for wage earners to want to use it.

Money doesn’t necessarily need to be easy to use for a wage earner to adopt it, it just has to be useful for payment of goods and services.

Consider using banks for your money:

If you receive cash, you have to transport yourself to the bank, and have enough of a balance according to the bank to open an account. Then you get to fill out all sorts of paperwork, provide documentation, pass their vetting, order checks or a debit card, then wait until you receive them. After you receive them, to use the account, you have to either carry a check book or a debit card wherever you go to pay for the things you need. And every time you receive a check from your employer, if you want faster access to that money, you have to transport yourself to the bank again, deposit the check, and then wait a day or two, unless the check is over $2,500, then you have to wait longer in some cases. If you bank at the same place as your employer, you can receive an almost instant transfer, but if you want to receive money electronically at a different bank, you’ll have to wait. If you want to stay home, new technology makes it so you can scan your check with your phone and deposit it that way, but then you might have to wait another week to have access to that money. Plus, you pay a fee for all of these services.

And this is the system we use all the time.

It’s not convenient. It’s not easy. We’re just used to it. We drive to the bank, put our deposit in the pneumatic tube or the sliding tray, and off we go. We’re so used to it we don’t think about it in terms of ease of use.

Cash is only a little less convenient. You can use it wherever you want, but if you carry around all of your cash, and you get robbed or lose your wallet, then your cash is gone. Carrying around a big wad of cash after every pay day is inconvenient, and having a safe at home or something like that is an added expense, but can help with security. Banks have a little more security, and insurance, and theft protection programs, so they have an advantage over cash. Cash isn’t convenient, but it is more convenient than banks. But you can’t pay all of your bills with cash. Many vendors won’t accept cash, and it is dangerous to send cash in the mail. Long distance use of cash is difficult and potentially dangerous and costly.

Clearly ease of use isn’t a consideration when we think about money. It just has to be accessible in some way or another.

So how do you get money in to the hands of wage earners, make it accessible, and give it enough value that they want to accept it as payment?

Our current monetary scheme works like this, in order: the Fed creates credit for banks or prints up currency and transport it to banks, which lend the money to entrepreneurs, which spend it with other businesses, which pay their employees (the wage earners), who then use the currency for the things they need, either as cash or through banks.

A full reserve precious metal money system works like this: miners or mining companies scout out and extract precious metal like gold and silver, which they sell to a mint for minted coins, which they spend with other businesses, who pay their employees.

A fractional reserve precious metal system works like this: mining companies extract the metal and have it minted, which they deposit in banks, which lend out as much of it as they legally can, and keep a record of it so the mining company can use it to pay for things, which pays a business, which pays the wage earner.

Government-only money is when the government prints up currency and introduces it in to circulation by buying things from entrepreneurs which pay their employees with that currency.

In the first case a central issuing authority creates money and it ends up making its way to wage earners through layers of commerce. The wage earner has little or no connection with the creation of money.

In the second case, there are special classes of entrepreneurs who deal directly with the creation of money, but wage earners, in this case still don’t have much connection with the creation of money.

In the third case, there are two classes that deal with money creation – mining companies and banks. Mining companies create the first money, and the banks amplify that money creation. Wage earners don’t connect with the creation of money, again.

Government-only money, on the other hand, is created by government printing presses and nothing else. Again, no connection to wage earners.

It begs the question, does it matter if the wage earner has a connection to the creation of money?

Most people use money every day and probably never think about how money is created or extinguished. Their connection to money is its buying power. If they can buy what they want with it, they’re happy in ignorance.

Each of the schemes above require trust for them to continue peacefully. If we don’t trust money, we simply stop using it, and we will find some other suitable money.

We trust the current scheme, mostly because of the name (it alludes to being official and authoritarian) and our living tradition. Unless we’re older than 101, we haven’t lived under any other monetary scheme. We trust it because we have always used it and it feels official and normal. Our central bank feels like our friend and our protector, in spite of all the evidence to the contrary.

Central authorities are prone to despotism and tyranny. We’ve been living with it since 1913…and lost 98% of our money’s buying power.

Is it possible and would it be a good thing to decentralize the creation and distribution of money?

Democracy, the even and equal participation of citizens in government, is something we’ve never really tried monetarily (or politically for that matter). The gold and silver standards come close. But fractional reserve lending and paper substitutes of physical gold and silver kind of kill the benefits of gold and silver, in my opinion.

What can we do? Are monies instituted among men, deriving their just powers from the consent of the users? Whenever any form of money becomes destructive, is it the right of the people to alter or to abolish it, and to institute new money, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their safety and happiness? (paraphrased from the Declaration of Independence)

We’ve never seen a money created by users, at least not in the last 100 years, which has ever been adopted widely.

I suspect this lack of historical evidence for a democratic money is about to change.

Let’s consider Bitcoin and it’s derivatives for a minute.

Bitcoin was created by an anonymous programmer, released as open source software accessible to anyone, and the only trust needed to use the system is a trust in software. There is no central issuing authority to trust, just an algorithm. Each of the Bitcoin derivatives like Litecoin have feature differences that affect their value, but they are all based on almost the same software.

Bitcoin is accessible. To use Bitcoin as money requires a computer with an internet connection or a smart phone with an internet connection. No expensive software is required. All the software is free and open source. If you want to accept bitcoin in payment and buy things with it, you download the software, someone transfers their bitcoin to you, and then you transfer it to someone else. The fees are very minor (less than 1%). Bitcoin can be transferred all over the world or just to your babysitter. You don’t have to carry anything other than you normally carry to use it, if you carry a smart phone.

Bitcoin is decentralized. Everyone that participates downloads the ledger of transactions. There is no central server that, if crashed, would take down the system.

One problem, from the perspective of the wage earner, is Bitcoin’s adoption and use. At the present time, a wage earner would not find Bitcoin to be the most useful currency available. In order to pay for the necessities of life (i.e. housing, transportation, food, etc) a wage earner would need to convert Bitcoin to the local currency of choice before using it. Bitcoin is young though, and more businesses are accepting it every day, so eventually the wage earner could find Bitcoin even more useful than other currencies.

One really interesting feature, from a wage earner’s perspective, is the ability to participate in money creation. With minimal investment and a little internet searching and reading, anyone that wants can participate in the creation of new money. It’s a process called mining, and it doesn’t take much to get started. It may not provide a tremendous amount of wealth for every miner that participates, but, like gold and silver but even better, it brings the creation of money closer to the wage earner.

Are there problems with Bitcoin and its derivatives? Yes, there are. Is it a perfect money? No. Does it have certain characteristics that make it superior to the current system? I say it does.

If you are asking me, we’re seeing a real democratization of money. Money of the people, by the people, and for the people.

One Comment

  1. Valerie April 26, 2014 at 10:41 pm #

    Thanks for this, Tyler. While you wrap your mind around monetary policy for fun in your spare time, most of us need it broken down into such basic terms. Enlightening.

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