Purpose of Money

“Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver.” — Ayn Rand

Money is the holy facilitator of our society. It’s the special combination of a store of value, medium of exchange, and unit of account. What makes it so important is its role as a facilitator to one of our most precious inventions as a species, our network of value & trade.

When we start to look at currencies as networks, or economic currents by which humans store and exchange value (the word currency itself comes from curraunt, or ‘in circulation’), we begin to understand the configurations of these networks. Just like a national currency is used by a subset of the entire population of the world, a nation, we can design currencies that circulate between different subsets of people with different needs, wants, beliefs, and categorizations. We can design currencies for specific values, then tweak the relevant interest rate up and down to fit specific situations. We can restrict usage even further to localities, or to industries, to company supply chains or even to virtual commons who have never met, such as a group of environmentalists or cyber-libertarians to create new relationships and buttress support for people who want to be in the same network. The possibilities are endless.

I have one point that I want to emphasize, and maybe this place in the writing is as good a place as any: it is my belief that these new ideas for different currencies should come as complementary currencies. It is in no way my aim or my belief that we should replace our currencies wholesale with different ones (although a time might be coming when we’ll have to — google John Law if you’re curious.) This would simply replace our current monoculture with another, equally unhealthy one. My dream is a world of many currencies, from local (such as locality loyalty currencies) to global (such as bitcoin), industrial or agricultural, national, social, private, to aimful currencies where people easily exchange between one another, free to opt in and out of any network to fulfill their needs, wants and ideas. Our lives consist of different types of values, and quantifying all of them in the same bucket currency, no matter what you call it, is inefficient. It also leads to distortion and ambiguity in quantifying value.

Money, with the settings we’re used to, has only been around for the last 300 or so years. If history is our best teacher, let’s explore what existed before, and how we got to here.

When Wilhelm the Orange (King of England and Netherlands) gave royal blessings to the Bank of England (set up as a for-profit company) in 1694 to issue notes backed by the promise of the crown to fund his wars, he didn’t know he was inventing the economic backbone of the next 3 centuries. The bank quickly realized the gravity of its responsibility when it came to controlling money supply and inflation. Ever since the creation of independent central banks, concerned with regulating the economy of nations, it’s mostly been a trial and error learning curve. As nations battled with crises in their economy, whether the speculative bubbles like that of the famous South Sea Company, liquidity shortages and bank runs which occurred in the second half of the 19th century in the US, or deflation or stagflation, like of Japan’s Lost Decade, central banks had to come up with new and experimental ways to solve problems. These unorthodox methods lead to new problems and new learnings. The gist is, human economics is an emergent phenomena, a complex system. And we as humans, with our current technology, can only grasp the basic patterns and rules of the game because the whole picture is too complex for us to grasp clearly.

One such example of a blunder happened in 1929. The U.S. stock market crashed after the roaring 20’s, and the world economy was sent into a deep economic depression, much like what happened after the mortgage crisis of 2008. During the Great Depression, there were dozens of local recovery experiments happening across the US. Private corporate and corporate coalition currencies from localities and towns were dime a dozen, in places such as Massachusetts, Georgia, Illinois. It even came to a point where certain respected and well known individuals floated their own currency to reissue trust to a local economy! These experiments formalized on the federal level as the New Deal. Other parts of the world were not much different; in fact it was in Europe where the most noteworthy alternative currencies sprung up.

Wara, Worgl and WIR

In 1930s Germany, hyperinflation and the resulting rapid fluctuation of prices was bankrupting businesses left and right. German currency had become completely useless as a store of value.

One engineer in the town of Schwanenkirchen came up with a way to jumpstart his local economy. He decided to revive a bankrupt coal mine, which was providing much-needed jobs for the struggling citizens of Schwanenkirchen. He couldn’t get financing from the banks, because they too were dealing with a shortage of money. So instead, he brought together the miners, the engineers, the shopkeepers and everyone else in the town, and explained to them that they could open the mine together, and recreate all the jobs. The catch was, they had to print their own money in order to do so! If everyone in the town accepted payment in a “Wara script” instead of the national German currency, they could avoid the consequences of hyperinflation and rebuild their economy. What seemed like a crazy idea turned out to be quite sound. Within a short period of time, not only had the Wara salvaged the local economy, but it was circulating nationally. [2]

Inspired by the Wara, the newly-elected mayor of a town in neighboring Austria, Worgl, decided to issue its own local currency, aptly named “the Worgl.” However unoriginal the name was, the results were miraculous. In what had been a poverty-stricken town, the introduction of a local currency was able to eradicate unemployment. [3] The currency gained swift traction across Austria, and soon more than 200 villages and towns were accepting it. The phenomenon caught international attention, from the economist Irving Fisher at Harvard to the French Minister of Finance, who dubbed it it “the Worgl Miracle.” Fisher even suggested to Franklin Roosevelt that a similar scheme might work in the U.S., but no one took him up on it. However, that “miracle” was soon forced to cease operations by the Austrian Central Bank, much like the fate of the Wara in the Weimar Republic.

Although on a national level, the local currency movement was being shut down by the central banking authorities, on regional levels its success was evident. Another country near the crux of this revolution was Switzerland, which started to float its own complementary currency, the WIR, around the same time. It was a currency introduced by 2 businessman in 1934 to alleviate the shortage of currency and global financial instability happening within Europe and Switzerland at the time. Just like the Wara and Worgl, the WIR gained traction quickly, and was accepted by over 3000 businesses in the first year. However unlike the other two, it wasn’t shut down by the Swiss National Bank (although they did try to shut it down in a smear campaign). The WIR got its banking license in 1936, and is still operational to this day. The network transaction volume was around 1.4 billion dollars, and more than 25% of all businesses in Switzerland are engaged with WIR. [4]

These might seem like fun historical curiosities, but the same debates that informed the emergence of these local currencies are re-emerging today. [5] The 2010s are not at all unlike the 1930s, in economic terms, at the very least. We’ve had a severe economic recession in 2008 that brought global finance close to its knees, much like the Great Depression of 1929. Some countries, particularly several nations in southern Europe, Japan[6], and some of Main Street America [7] are still not fully recovered after 10 years. More so, slow growth and anxious uncertainty has seemingly become the norm in global economics. Income inequality across societies has also hit similar levels to the ’30s. In politics, we’re witnessing the rebirth of an authoritarian, protectionist, nationalistic and aggressive playbook in many parts of the globe. They say history doesn’t repeat itself, but often rhymes. This is true in the money debate as well, even given the pace of advancement brought on by digitization, globalization and information share.

This begs the question, of course: can alternative currencies address some of these same symptoms in our own post-crash economies? If a monolithic currency stretches the elasticity of value beyond its limit, and if our current institutions have failed to support the dominant network of value exchange, I would argue that it is time to consider some alternatives. Research shows, others think so as well.

“Alternative Currencies in Rapid Growth Phase” — EU Horizon Magazine, January 2017

If you think you’re fine just holding onto your dollars and not thinking about any of this, I invite you to consider the following. Becoming the world’s dominant trade currency is the most lucrative status a currency can reach. Today, it’s the US dollar, whose hegemony was established after the US emerged from the World War II as the clear leader of the free world. With the OPEC agreements after the Oil Crisis of the 1970s mandating that oil be traded in dollars across the world (Google: petrodollar), and the Dollar being set as the global reserve currency with International Monetary Fund rules mandating that all central banks accept the dollar, it became the de facto currency of our time. But it would be a mistake to assume that because it is so today, it shall always be so. We can’t forget that the baton was handed down to the dollar from the British Pound, which had received the coveted status from the French Franc after the French Revolution and the Napoleonic Wars. I used to think the Chinese Yuan was next in line — I now believe it will be a global currency, such as bitcoin.

Once a particular currency becomes dominant, it is human nature to abuse it. If we place all of the value in this one currency, and I would argue that the US dollar is significantly more powerful than any other single currency in world history, the very definition of value becomes distorted. Its collapse, which could come with any number of geopolitical power shifts, would therefore cause more damage than ever before, particularly to those of us whose entire “worth” is contained in the value of our dollars.