Arthue Shippee and Pablo Hoffman passed along this New Yorker article on the invention of money. Here's an excerpt - see the complete (excellent,
but lengthy) article online. Thanks. -Editor
Marco Polo was right to be amazed. The instruments of trade and finance are inventions, in the same way that creations of art and discoveries of
science are inventions—products of the human imagination. Paper money, backed by the authority of the state, was an astonishing innovation, one that reshaped
the world. That’s hard to remember: we grow used to the ways we pay our bills and are paid for our work, to the dance of numbers in our bank balances and
credit-card statements. It’s only at moments when the system buckles that we start to wonder why these things are worth what they seem to be worth. The credit
crunch in 2008 triggered a panic when people throughout the financial system wondered whether the numbers on balance sheets meant what they were supposed to
mean. As a direct response to the crisis, in October, 2008, Satoshi Nakamoto, whoever he or she or they might be, published the white paper that outlined the
idea of Bitcoin, a new form of money based on nothing but the power of cryptography.
The quest for new forms of money hasn’t gone away. In June of this year, Facebook unveiled Libra, global currency that draws on the architecture of Bitcoin.
The idea is that the value of the new money is derived not from the imprimatur of any state but from a combination of mathematics, global connectedness, and
the trust that resides in the world’s biggest social network. That’s the plan, anyway. How safe is it? How do we know what libras or bitcoins are worth, or
whether they’re worth anything? Satoshi Nakamoto’s acolytes would immediately turn those questions around and ask, How do you know what the cash in your pocket
The present moment in financial invention therefore has some similarities with the period when money in the form we currently understand it—a paper currency
backed by state guarantees—was first created. The hero of that origin story is the nation-state. In all good stories, the hero wants something but faces an
obstacle. In the case of the nation-state, what it wants to do is wage war, and the obstacle it faces is how to pay for it.
The modern system for dealing with this problem arose in England during the reign of King William, the Protestant Dutch royal who had been imported to the
throne of England in 1689, to replace the unacceptably Catholic King James II. William was a competent ruler, but he had serious baggage—a long-running dispute
with King Louis XIV of France. Before long, England and France were involved in a new phase of this dispute, which now seems part of a centuries-long conflict
between the two countries, but at the time was variously called the Nine-Years’ War or King William’s War. This war presented the usual problem: how could the
nations afford it?
King William’s administration came up with a novel answer: borrow a huge sum of money, and use taxes to pay back the interest over time. In 1694, the
English government borrowed 1.2 million pounds at a rate of eight per cent, paid for by taxes on ships’ cargoes, beer, and spirits. In return, the lenders were
allowed to incorporate themselves as a new company, the Bank of England. The bank had the right to take in deposits of gold from the public and—a second big
innovation—to print “Bank notes” as receipts for the deposits. These new deposits were then lent to the King. The banknotes, being guaranteed by the deposits,
were as good as gold money, and rapidly became a generally accepted new currency.
This system is still with us, and not just in England. The more general adoption of the scheme, however, was not a story of uninterrupted success.
To read the complete article, see:
The Invention of Money
Wayne Homren, Editor
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