Ekonomisk historia 101 – privata pengar

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.