From cowries to crypto

Chief economist at Efficient Group, Dawie Roodt, takes a macro view at the evolution of money and what its new form could mean for you.

Everybody seems to be rather nervous at the moment. Trump is fighting (tweeting) a world trade war, interest rates are going up, the world appears to be drowning in debt and many other imminent catastrophes are apparently waiting to happen. It is indeed a time to be nervous and worried. Yet, if we take a moment to reflect, we will see that we have never had it so good – and things are probably going to get even better.

For example, a century ago, more than 90% of the world’s population lived in abject poverty; today it is less than 10% and falling. At the current trajectory, worldwide, abject poverty will disappear within the next decade or two. Many other variables tell a similar story: improvements in life expectancy, literacy rates, crime statistics and preventable diseases, among others. Curiously, money seems to be at the centre of these amazing improvements in our quality and quantity of life.

Economists usually emphasise three functions of money: a store of value, a unit of account and a medium of exchange. Of these three functions, money as a store of value is often most emphasised. People think of money as ‘wealth’; yet, there is much more to money.

Money has evolved over time. Initially, mankind had no generally accepted form of money and trade happened through a process called ‘barter’. Trade in itself was a huge breakthrough because whenever two individuals enter into a trade agreement, both parties gain from the transaction. This is the case because no trade will take place if both consenting parties do not accept the conditions related to the trade agreement and gain from it.

It may be that one of the parties later discovers they were deceived or could have gotten a better deal somewhere else, but at the moment of the trade both parties gain from the transaction. From this follows the rule: trade always adds value to both trading parties. This is where the magic of money comes in. Money allows for easier trade, in which an owner can exchange his property for money that he can then use to buy a chicken, saving the rest of the money for future consumption.

Money reduces transaction costs. With every evolution of money, transaction costs have been further reduced. Initially, money took the form of cattle, cowry shells and a myriad of other forms until precious metals became the standard. From there, money evolved further into derivatives of precious metals. The ‘gold standard’, for example, was money issued by central banks ‘backed’ by gold residing physically in their vaults. Every time money evolved from one form to the next, it became more efficient and contributed to even lower transaction costs and, as transaction costs fell, people transacted more. The more we transacted, the more we all gained and the more wealth was created.

Initially, most monies were privately issued but, as those in power realised the amazing power of money, they sought to control it. Today, most monies are issued by central banks that have exclusive rights over the issuance of money – central banks are statutory monopolies. But like all forms of power, power over money also corrupts and state-controlled monies usually fail.

By 1971, most central banks had abandoned the gold standard and today, most monies are fiat currency – money created by decree, essentially out of nothing. In fact, most money today has lost its physical form and exists only as digital zeros and ones. Most banks, central banks and governments would prefer a world without physical money at all and, in some countries, physical money is deliberately being phased out.

The evolution of money continues to be relentless and newer forms continue to appear. The most recent forms are bringing us back to privately issued money in the form of cryptocurrency, fully decentralised digital or virtual currency, and blockchain, a digital, decentralised public ledger of cryptocurrency transactions. Like previous evolutions in money, these new alternative forms reduce the cost of transactions and contribute to the process of wealth creation.

As in the past, a slew of politicians are on a quest to control these new forms of money. In the years to come, they will likely try to protect their own money-making monopolies (central banks) by trying to take ownership of, or even banning, private monies. Luckily, the technology associated with this new form of money is such that control becomes much more difficult. The most recent evolution in money once again places the issuance of money in the hands of the private sector, along with all the risks and benefits associated with it.

While the next chapter in the evolution of money is still being written, money will certainly evolve once again evolve (or devolve?) in the future to be largely privately issued. This will undoubtedly undermine the power of the state, politicians and central banks – although they mostly seem to be unaware of this. South Africa is particularly well-positioned to benefit from private money. In the past decade, the state arguably failed in many functions – like education, health and security – and in all instances, the private sector stepped up to the plate. Now we see that the state wants to nationalise the South African Reserve Bank (SARB), which will not achieve much provided its independence is not affected. Yet the mere fact that politicians are eyeing the SARB gives reason for us to be concerned. Will they go even further and eventually dictate monetary policy, undermining the Rand in the process?

Additionally, state-owned banks are being considered in this way while our economy is in an absolute dismal state (thanks mostly to a destructive government in recent years). To allay some fears, this is happening in a surprisingly sophisticated environment that has many well-qualified people with the skills and means to create their own money, and a public that is looking for opportunities to reduce their excessive tax burden. Private encrypted monies are ready to roll.

That is the reason why cryptos are so increasingly popular in South Africa. All that is needed is a breakthrough with a particular currency that can maintain its value relatively well and which is trusted, and a process of abandoning the rand might happen surprisingly quickly.

For now, the authorities are not worried about the disruptive powers of cryptos. That is the reason why little exists in the way
of official policy. One exception is that SARS has made it clear that it wants its pound of flesh should you make any money with cryptos. Such a reaction was expected, but here’s the thing: exactly how will it enforce tax collections on an encrypted anonymous decentralised platform?

History has taught us that money always evolves and keeps on making it easier for us to transact. And, in an environment where the state has undermined business, cryptos may just be the opportunity for business to escape the claws of the ineptocracy.

For you and me, the future is likely to be better than the present, with even lower levels of poverty and more of everything else that we consider good. Tomorrow’s world will be one with more personal freedom and more personal risk; I definitely prefer that to the opposite.