Private money, Money shortage, Wildcat banks, Scrip, Ithaca Hours, Electric money, PayPal, Ali Pay, We Chat Pay, Credit cards, Fraud protection, Kryptovalutor – deras styrkor och svagheter, Centralbanker och deras valutor
0:00 Let’s talk about bitcoin and other cryptocurrencies and how they fit into the long
0:04 history of privately issued currency. While the technology underlying cryptocurrencies is new, the
0:11 core idea of non-government issued money has been around a long time and usually it existed to solve
0:17 problems that sovereign currency could not. In the United States, the government is not
0:23 the only entity legally allowed to issue money. Private citizens and businesses are allowed to do
0:29 so, too, and throughout U.S. history, they have done this. This type of money is referred to as
0:35 private money, and it had mostly disappeared from circulation until Bitcoin was created in 2009.
0:42 Today more than eight thousand cryptocurrencies exist, and more are appearing every day.
0:48 The extreme volatility that we see in cryptocurrencies – mostly caused by Elon Musk’s
0:54 twitter activity – highlights that most people view them as more of a speculative vehicle than as
1:00 usable money right now. Historically, when private currencies were widespread in the United States,
1:07 they were used for day-to-day spending by the general public, and people mostly just hoped
1:12 that they would hold their value. Before the Federal Reserve act of 1913 and the printing
1:18 of the first Federal Reserve Notes, hundreds of banks in the United States issued “thousands
1:24 of different kinds of currency which were as a group the effective currency of the country”.
1:29 So why were these private currencies so popular and so widely used? Well,
1:35 initially in the colonial era, there just wasn’t enough sovereign currency to go around. Later,
1:41 huge amounts of money were printed during the American Revolution to pay the troops,
1:46 which led to hyperinflation and food riots. The British Government printed counterfeit
1:51 US currency during the revolution too, to finance their war effort and to undermine the rebellion.
1:58 This experience made the founding fathers of the United States quite wary of paper money,
2:04 so they gave Congress the right to issue money but forbid the individual states from doing so.
2:10 They allowed private citizens and private companies to create their own forms of money too,
2:16 and thus in the 1800s, much of the country’s paper currency
2:20 consisted of notes issued by private banks – which were not backed by the government,
2:26 and if one of these banks went bankrupt, its currency would become worthless.
2:30 Private money was an innovation that arose to fill voids left by the government-provided
2:36 or sovereign currency of the time. Studying the various examples of private money taught
2:42 economists, a lot about the quality’s money must have for it to be useful and generally accepted.
2:48 So, What lessons have been taken from the history of private money, and what they might imply
2:54 for our money today and in the future? Well, the history of private currencies in
2:59 the United States begins with the first European settlers, many of whom arrived in America with the
3:06 idea that huge deposits of gold and silver would be found. No sizeable supplies were discovered,
3:13 and the settlers had to rely on official British currency that had been brought over
3:18 and on a variety of foreign coins to supplement it – all of which was in short supply. Economies
3:25 can’t really function if there is no way of transferring value or storing wealth. So,
3:31 commodities like tobacco, beaver skins, and wampum – which is money made from a type of clamshell,
3:37 served as currency at various times. Wampum was one of the most popular alternatives as it was
3:44 already in widespread use by Native Americans, and so it became legal tender in several colonies.
3:51 Before the American Revolution, the shortage of coin was such a problem that
3:56 colonial loan offices began issuing bills of credit. Local banks additionally took
4:02 in gold and gave out bank notes in return, including some in very small denominations
4:08 which were badly needed for daily purchases. One of the problems with this bank-issued currency
4:15 was that it couldn’t circulate too far from the issuing bank, where the notes could be redeemed
4:20 back into gold and silver. Businesses located at a distance often only accepted these notes
4:27 at a discount or wouldn’t take them at all. To make the notes more useful,
4:32 some banks made deals with others in nearby cities to accept each other’s notes.
4:38 Buyers and sellers back then had to be very careful about the bills they took. If a bank
4:44 went bust, its currency would become worthless. So, merchants and consumers often used brokers,
4:51 who understood the quality of the different banknotes. Another danger during this period
4:57 was counterfeiting. Much as governments do today, banks back then went to a great deal of effort
5:03 to make their bills hard to copy, using engraving, watermarking, and distinctive images.
5:10 In 1690, the Province of Massachusetts Bay created “the first authorized paper money
5:17 known as “bills of credit” issued by any government in the Western World”
5:22 and the other colonies soon followed suit. The long list of private currency issuers
5:28 in US history doesn’t just include banks. Canal and railroad companies,
5:33 coal mining and lumber companies all issued money, often called scrip, to pay their workers.
5:40 Merchants, farmers, and community groups also created their own money. All of these forms of
5:46 private money arose to meet real needs that were not being met by government-provided
5:51 money. These private currencies were needed to make small purchases, they allowed for a medium
5:57 of exchange in remote locations and provided a means of exchange during financial panics.
6:04 OK, so first up, why were there so many private currencies to begin with?
6:10 Well, while the US Treasury was issuing coins and a limited number of bank notes by the 1800’s,
6:17 paper money was mostly being issued by state and National Banks, these were private currencies,
6:23 but they weren’t the only ones, because banks were prohibited from printing small
6:28 denomination bills by their regulators. There were some economic theories underlying
6:33 this prohibition, one of which was that small denominations could cause inflation,
6:39 as prices could easily be increased by small amounts if small denominations were available.
6:45 Adam Smith argued in the Wealth of Nations that small denominations of bank notes should
6:51 be banned, in order to prevent inflation. His logic was that back then, bank notes were mostly
6:58 redeemable into gold or silver coin. Smith believed that the public would have a greater
7:04 incentive to redeem large denomination notes into precious metals, and this frequent redemption
7:11 would keep the banks honest. The fact that notes were frequently being redeemed would prevent banks
7:17 from printing more notes than they could redeem with the gold and silver they kept on hand.
7:23 The idea was that stopping the banks from printing unbacked paper money would prevent inflation.
7:30 So, at the time, the smallest denomination of federally issued currency and bank issued currency
7:36 was the $1 bill and $1 represented a large amount of money back then. In the 1800s, a laborer
7:44 typically earned around $5 per week, a newspaper cost a penny and a pound of bacon cost around
7:51 five cents. Trying to buy everyday items was impossible using state and national bank notes.
7:58 This meant that there was a liquidity problem, and not only that, it got worse over time.
8:04 National bank notes could be issued only in denominations of $1 or more up until 1879,
8:12 and after 1879, only in denominations $5 or more. By 1882, all smaller denomination national
8:21 bank notes had been taken out of circulation. Now the Treasury did issue silver coins in dollar,
8:28 half-dollar, quarter, dime, and half-dime denominations, but due to a shortage of silver,
8:34 there weren’t enough of these coins to go around. One problem was that the silver in the coins was
8:40 worth more than the coins, so people would hoard them. Without small-denomination coins
8:46 being available, businesses often paid a premium for them in order to be able to make change for
8:52 their customers. When the civil war broke out, the country found itself, in the midst of a war boom,
8:59 without a widely accepted currency unit smaller than the five-dollar bill. This situation meant
9:05 that there was a role for privately issued small-denomination currency, and private
9:11 individuals and companies stepped in to meet the need. They made both paper money and tokens.
9:18 In 1862 Congress reacted to the private money situation by forbidding private
9:25 citizens or companies from issuing paper currency in denominations of less than $1.
9:31 In order to avoid legal problems, private issuers of paper money began denominating their currency
9:38 in services (for example, miles of railroad service) instead of in dollars. In 1864,
9:46 Congress went on to prohibit private coinage “intended for use as current money.” However,
9:52 the courts have frequently upheld the private issuance of coins or paper money
9:58 if it circulated locally or was redeemable in goods or services and not in dollars.
10:04 The period from 1837 to 1864 in the US is often referred to as the Free Banking Era.
10:12 During this period, if a currency issuer went bankrupt or just left town, the notes they had
10:18 issued would become worthless, and this happened a lot. These banks earned the nickname of “wildcat
10:25 banks” for a reputation of unreliability; they were often situated in remote areas said to be
10:32 inhabited more by wildcats than by people. The National Bank Act of 1863 ended the “wildcat
10:40 bank” period. The government-created paper money that followed was far simpler to use
10:45 than private currencies and more reliable. But widespread private money was not yet done with.
10:52 Towards the end of the nineteenth century there was a boom in mining and lumber.
10:58 The natural resources companies were usually located in remote parts of the
11:02 country far from banks. They would issue their own money, commonly known as scrip,
11:08 redeemable in goods sold at the company store. Workers were not delighted to be paid this way
11:15 and often sold their scrip at a discount to get money that could be used for purchases elsewhere.
11:22 The use of scrip was widely criticized at the time, but the courts ruled that it didn’t
11:27 violate the 1862 and 1864 banking acts, since it was not intended to circulate widely as money.
11:36 Other problems that private currencies solved historically was that they could fill in for
11:41 government issued currency during financial panics. During the Great Depression, bank runs,
11:47 were common. Banks often responded to runs by suspending withdrawals temporarily – refusing
11:54 to allow customers to take cash from their bank accounts. Bank runs became so severe during the
12:01 depression that in March 1933, President Roosevelt declared a four-day “bank holiday,” later extended
12:09 to a week, closing banks across the nation. In response, school districts, local businesses,
12:16 and individuals issued private money. State and city governments issued their own local money as
12:23 well. Businesses, unable to make payrolls, paid workers in scrip which was usually redeemable
12:30 into official currency once banks reopened. The acceptability of scrip depended heavily
12:37 on the credibility of the issuer. People were more likely to accept municipally issued scrip
12:43 if the municipality would also accept it in payment of taxes.
12:48 Over time private currencies mostly disappeared, they caused as many problems as they solved.
12:55 There were exceptions. The Ithaca Hour was a private currency in Ithaca New York founded
13:02 in 1991 with the goal of keeping capital in the local economy. One Ithaca HOUR was valued at $10
13:11 and was generally recommended to be used as payment for one hour’s work.
13:15 It was one of the longest-running local currency systems, but today is no longer in circulation.
13:22 So, what problems occurred with private currencies, and what did people learn from
13:27 their use? Well one lesson we can take from the history of private currencies is that a given
13:33 currency’s success was heavily tied to the quality of its issuer. People needed to believe that the
13:40 value of a currency would be honored when they got around to spending it. Another observation
13:47 is that historically private currencies were extremely localized. They didn’t circulate widely.
13:54 Additionally, we can see that ease of redemption mattered a lot. Money that was hard to redeem
14:00 was either discounted or not accepted at all. With the emergence of the internet the inadequacy
14:08 of cash as a method for making payments in the growing world of e-commerce seemed to
14:13 lay the foundation for the emergence of electronic money. When purchases over the Internet expanded,
14:21 the vast majority of Internet purchases were made using credit cards. Brokered payment
14:27 systems like PayPal emerged to facilitate the payment between a buyer and seller. The buyer
14:34 authorizes the broker to transfer funds out of an account held with the broker to the seller of
14:40 the product. The broker has all the private information regarding the parties involved,
14:46 and buyers and sellers do not need to know this information to complete a transaction.
14:52 It is inaccurate to call these payment innovations new forms of money though.
14:56 They are just new ways to make payments, with significant transaction fees borne by the users.
15:03 In China Alipay and We Chat Pay dominate consumer payments. Money flows through these digital
15:10 ecosystems that blend social media, commerce and banking. These payment systems are tied to
15:17 underlying bank accounts. In Africa M-Pesa is a mobile phone-based payments and micro-financing
15:25 service, launched in 2007 by Vodafone and Safaricom, the largest mobile network operator in
15:33 Kenya. It is operated by mobile network operators not banks. M-Pesa customers can deposit and
15:40 withdraw money from a network of agents that includes mobile airtime resellers and retail
15:47 outlets. The system allows the unbanked to make electronic payments with relatively low fees.
15:54 These systems are very different to how things work in the US and Europe where banks and credit
16:00 card companies dominate. While big banks might worry about technologies like We Chat Pay and
16:06 M-Pesa taking their business, it may not happen too quickly. American consumers
16:12 love credit card rewards programs, and the built in fraud protections. On top of this,
16:18 U.S. bank deposits are backed by insurance from the Federal Deposit Insurance Corporation
16:25 which is attractive to consumers. As I said though, these systems
16:29 are just technologies for transferring money, they are not private currencies.
16:35 Cryptocurrencies are the newest innovation in the private currency space.
16:40 They are decentralized private digital currencies that use cryptography to safeguard transactions
16:47 and control the creation of additional units of currency. Bitcoin issued its first block in 2009
16:54 and has quickly become the best-known and largest cryptocurrency in terms of total market
17:00 value. But as I mentioned earlier more than eight thousand different cryptocurrencies exist today.
17:07 Cryptocurrencies are mostly used for speculative purposes right now,
17:12 rather than as actual currencies. People are not usually being paid in cryptocurrencies,
17:18 and goods are not priced in them either. Most cryptocurrencies are not backed by anything
17:24 other than the faith of the people who own them unlike a lot of the historic private currencies
17:30 that were at least supposedly backed by precious metals, US dollars or exchangeable into goods
17:37 at the company store. Cryptocurrencies are not cheaper to transact with either, they
17:43 tend to be expensive and slow. It takes about 10 minutes for a bitcoin transaction to be validated,
17:49 and the average fee for just one transaction is around $20. Ethereum, the second-largest
17:55 cryptocurrency, processes transactions slightly faster but also has high fees.
18:02 As I mentioned earlier, private currencies were historically used because they solved
18:07 problems with sovereign currency. They filled in when there was a shortage of coin,
18:13 when there were no small denominations, when banks closed during the depression and so on.
18:19 What problems do cryptocurrencies solve today? Well, cryptocurrencies first appeared in 2009
18:26 right after the global financial crisis, and some of their popularity relates to a lack of faith in
18:33 modern central banking and monetary policy. They grew in popularity during the covid pandemic, and
18:40 this resurgence could relate to concerns over the huge government spending to keep economies alive.
18:47 A lot of new regulation came in the wake of the global financial crisis too – things like FATCA
18:54 and other anti-money laundering rules, which made transferring funds using traditional means slower
19:00 and more expensive. Cryptocurrencies have been popular amongst those worried about government
19:07 surveillance too, this includes criminals who wish to hide their financial dealings but also those
19:14 living under oppressive government regimes. People who worry about inflation and who don’t trust
19:20 the government tend to like cryptocurrencies. Cryptocurrencies may or may not persevere in the
19:26 long run, but they are bringing transformative changes to money and finance. The prospect of
19:33 competition from these private currencies has pushed central banks around the world to consider
19:39 digital versions of sovereign currencies. In the long run it is unlikely that 8000
19:44 cryptocurrencies will remain in use. The exchange rate between the Dollar and the Yen fluctuates
19:51 by as much as 15% year to year, even though the “fundamentals” of the two economies show much less
19:58 volatility. A world with thousands of additional currencies would leave people living with exchange
20:05 rate chaos. The benefits of central bank digital currencies are not obvious to me either. Even the
20:13 Federal Reserve has stated that the design of such a currency, would raise important monetary policy,
20:20 financial stability, consumer protection, legal, and privacy considerations.
20:26 Let me know your thoughts on the pros and cons of private currencies in the comments section below.