WiredBitcoin Is Pointless as a Currency, But It Could Change the World Anyway
By Felix Martin
03.31.14 | 6:30 am
Sovereign governments everywhere are petrified. An ingenious new invention that allows people to make payments across borders without leaving a trace in the official monetary system is spreading like wildfire. Its workings are so clever that few understand them. It’s backed by some of the leading entrepreneurs of the day. The embattled establishment is warning that the state’s right to regulate finance is being undermined.
That may sound a lot like bitcoin in 2014. But, in fact, it’s the story of a much earlier episode of monetary innovation: the birth of modern banking in sixteenth century Europe.
For just like Bitcoin’s mysterious creator, Satoshi Nakamoto, the bankers of Renaissance Europe invented their own form of money. And their experience, it turns out, can teach us a thing or two about bitcoin. Above all, this can show that bitcoin’s boldest promise lies not as a currency, but as a reboot of the way money works which has its origins 500 years in the past.
The King’s Money
In the early middle ages, Europe’s feudal society began to re-monetise. Obligations that had previously been rendered in kind – the tenth of one’s produce paid to the landlord, for example, or the two week’s of one’s labour owed to the king – began to be valued and paid in money instead. Whose money? The king’s, of course. Sovereigns guarded their exclusive right to issue money jealously and forbade from their subjects the minting of metal coinage, the standard payments technology of the day.
Their subjects were not happy with this situation. They enjoyed the explosion of commerce that money brought. But sovereigns had a nasty habit of abusing their monetary monopoly to fund their wars and debauchery. The medieval merchant was constantly at risk of a sudden debasement of the currency designed to transfer his hard-earned wealth to his predatory monarch.
Many were the complaints lodged against this politically unjust and economically inefficient situation — but few were the concessions from the sovereigns. That is, until Europe’s merchants re-discovered a clever technology that enabled them to escape the sovereigns’ greedy clutches: the ancient art of banking. Why bother with our rulers’ myriad, unreliable, national moneys, these clever entrepreneurs asked, when we can have just one and manage it in our own interests?
And so they did. The merchants began to account their debts to one another in their own, private, international monetary unit — the écu du marc. They had no need of coinage to represent their new money — that was yesterday’s game. Instead, they deployed bills of exchange — written records of credit balances. Such was the trust they had in one another that no collateral was required to back this stateless paper currency — just a quarterly conclave at the great fair of Lyons, where outstanding balances could conveniently be cleared. It was an extraordinary achievement — nothing less than the creation of a private money to settle payments on a continent-wide scale. It was not unusual, wrote a contemporary observer, to see “a million pounds paid in a morning, without a single sou changing hands.”
But there was the rub. The disappearing sou was a coin of the French king. The impact of the merchant-bankers’ splendid innovation was not just economic, but political. Just as the new private money increased his subjects’ control over their financial affairs, so it diminished the king’s command of his tax base — and so threatened his political authority. The result was a long-running guerrilla war between sovereigns and their subjects over the central questions of the monetary standard: what rule should govern how much money should be created, and who should get to decide?
It was a battle neither side could really win. The merchant-bankers had the killer payments technology — but their private money could not circulate beyond their tight-knit circles. Sovereigns, meanwhile, could make their money circulate all right — but their profligacy ensured that this happened only under duress. It was centuries before a truce was declared with the foundation of the Bank of England in 1694. The bankers would contribute their payments technology and their commercial nous, and in return, the king would allow them to issue his sovereign money, the pound sterling.
Henceforth, money would be a hybrid beast — issued by private banks, but under license from the sovereign — and its creation would be managed according to neither fiscal nor commercial interests alone, but as a compromise hammered out between the two. It was nothing short of a Great Monetary Settlement: a politico-monetary quid pro quo that has remained the basis for all capitalist financial systems ever since.
The Lessons We Can Learn
So what lessons does this Old World precedent hold for money’s latest manifestation? The first is that bitcoin’s real promise does not lie in bitcoins themselves.
Consider, to begin with, the issue the monetary standard. Any money is essentially a system of transferable credit. An extraordinary variety of tokens have been used over the years to represent and operationalize such systems, from gold coins to written entries in account books, but the essence of money — an underlying system of credit accounts and clearing — is always the same.
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