History does not repeat; it rhymes.
Current stability comes from confidence and force. We’ve all heard that cliché over and over. But to rhyme is to the use any words you choose. We can rhyme in paper or digits, but it is all backed by nothing.
There is a not-so-subtle difference between currency and legal tender. Legal tender implies both force and control. And it’s worthwhile to explore how far history can be re-expressed through technology.
A currency is simply an IOU, a convenience ticket or token used to settle a debt. Or a transaction, representing a deposit or asset kept someplace else.
Placing legal authority around one particular currency immediately transforms its value and activates Gresham’s law. The speed of the transmission where good money goes into hiding is directly proportional to the relative stability of the issuing authority.
Force is the other component. Energy and the military are part of that too, and these are what make the dollar the cleanest shirt in the room.
The sobering sentiment might be translated thusly. If half the effort you put into life wasn’t stolen at the point of a ‘gun’, by the government to pay off the interest of central banks on money they really didn’t need to borrow with interest anyway, perhaps there would not be as many people suffering.
By law, fiat money is debt in our current environment. It turns rational people into outlaws and criminals.
Money matters underlie the entire social and political process.
Exerting official control over the currency enables the central issuing authority dominance over every aspect – everything that falls afterward.
It is the locus of control and, by proxy, perception. They shape it any way they want. Take precious metals price manipulation as an example. Human nature is such that we often need to project conscious intention, in which the system itself evolves to the point where only a limited choice of actions remains. It is obviously wrong to distort prices, but the mechanism is enabled by a much broader and complex set of systems than a group of humans.
To the outside observer, the pricing of precious metals dropping on days when major military movements, Middle Eastern rebellions, and continued volatility color the trading landscape.
Precious metals speculation, or intrinsic value, is hidden by the controlling entities who dominate its main price determining mechanism. And obviously, this is merely one manifestation of when a social system (otherwise held together by civilized exchange) becomes unrecognizable, soon to be spinning out of control.
The Tentacles of Legal Tender
On a macro scale we are witnessing the age of depositor bail-ins, capital levies, and massive growth of money supply. On the micro level, it is price controls and barter rules creeping in from the depths of bureaucracy.
More than a third of the working age population are (in essence) paid to stay at home. After-tax income for most available jobs simply does not compare with the tax free reliability of a government assistance handout. Meanwhile, an underground cash economy is evolving.
This is not going unanswered. We have seen the creeping hand of authority enter all the way down into classified ads when, in 2011, the State of Louisiana passed a law banning cash transactions via classified ads:
“A secondhand dealer shall not enter into any cash transactions in payment for the purchase of junk or used or secondhand property. Payment shall be made in the form of check, electronic transfers, or money order issued to the seller of the junk or used or secondhand property and made payable to the name and address of the seller. All payments made by check, electronic transfers, or money order shall be reported separately in the daily reports required by R.S. 37:1866″.
Technological Response to Legal Tender or Another Silk Road?
Obviously, this would not be easy to enforce, but it should sound somewhat familiar given the official (hypocritical) propaganda that arose against the first and most well known of alternative or crytocurrencies, Bitcoin.
Seems the anonymity of legal tender has been called into question. The irony, of course, is that the same legal tender is used to launder billions for drug cartels by one of the largest banks on the world – a crime that was punished by what would amount to be a speeding fine for most people.
The Silk Road legacy of Bitcoin continues to weigh on its existence. But the rise of alternatives is becoming a natural consequence of a financial system so big that it has literally suffocated a once quasi-legitimate economic system.
The recent Mt Gox implosion is much like a bank (or a silver exchange!?) going under because of bad business or an overextension of deposit to loan ratio, inducing a type of run.
We can witness the early stages of this progression through “NoFiatCoin”, a new Cryptocurrency with bullion backing.
An expression of Gresham’s law through technology?
Technology and anonymity are peaking at the same time faith in institutions hits rock bottom. Decades of research and development have produced a cryptographic mathematics that makes anonymity possible in the Internet; at least enough to support a market for new so called electronic currencies.
But it is a mere tributary.
Alternative currencies remain predominately market-based. Their value or backing is dominated by speculation, which may seem better than debt but is ultimately a weakness.
Alternative currencies are not widely adopted by any measure. This is expressed indirectly by the tone in which the mainstream conveys the news surrounding it.
Currencies – commodity backed, fiat, and legal tender – have waxed and waned throughout the history of civilizations. It is not much of a stretch to envision the next wave of electronic currencies anchored by commodities, especially in the aftermath what has been the latest forced legal tender experiment.
Ultimately, we can envision electronic currencies could replace the currency fiat system. In the meantime, most of you reading this will witness the final innings of yet another unbacked (and ultimately failed) currency experiment.