Introduction to Digital Currencies

Lesson 1 – Currencies in the Pre-Computer Age

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Welcome to Introduction to Digital Currencies, an original Coin Academy course designed to introduce you to the origins of digital currencies. This course has four lessons. The first lesson, Currencies in the Pre-Computer Age, is about to begin.

In the beginning, there was barter, but the next step was not money contrary to popular belief. It was, in fact, receipts – receipts that represented items of value for which the receipts could be exchanged. Most people in these ancient times were illiterate so there was no need to code information. But as more people became literate by 1500 BC, these ancient receipts actually became encrypted. They were encrypted documents hiding transaction, data, and other information within the dozens of strokes in the clay tablets. The Babylonian tablet at right gives you an example of this early encryption system. So the roots of encryption, which we see in modern cryptocurrencies, go all the way back to early, early days and the very roots of the monetary system.

The next step as you might expect was, in fact, something we would recognize today as coins. Money first began to appear in the areas that generated sufficient surplus for export so these coins became tokens that represented particular items of value typically in the export chain. That’s why many of the currencies were named after commodities such as the Shekel, which is shown in the image here. Shekel actually means bushel, which early on a Shekel coin was convertible to a bushel of a particular grain. Now, as the small societies and cities came under the control of empires, the rulers of these empires wanted control over their realms so they minted their own currencies, and these currencies were unique to that region and they tried to grow and expand their reach. This is where the concept of currency orthodoxy originated. If you wanted to exchange goods of value in this region, you had to use the proper currency. This is where the fiat currencies of today all came from.

But of course, any times there’s leadership and there’s control, there are going to be crises. There’s going to be revolts. And there’s going to be people that want to have an alternative. And this is when the first alternative currencies arose. As the empires change, their currencies continue to circulate because oftentimes, they were made of valuable metals. But they circulated now as secondary currencies or were sometimes restruck into new currencies. The image on the right shows you an old Roman coin. Notice the depressed rim around the outside. This was created by taking a die that was sort of a doughnut shape. The center was hollow and then placing that over an existing coin and hammering it down to restrike that coin and create literally an alternative currency. It’s almost as though they were forking an existing physical currency.

Now, for many years, many centuries, economic thinking really didn’t change that greatly. Then, we had the rise of Social Darwinism, which believed just like traditional Darwinian principles, that the strong would survive and that there was an evolution based on strength. But in the 1870s, along came Russian Prince Peter Kropotkin. He conducted a number of field studies in Siberia. And those studies demonstrated that in numerous ways, the survival of animals, people, and even societies was actually the result of cooperation and not pure competition. It was a response to Social Darwinism. He wrote a book called Mutual Aid: A Factor of Evolution. And it spawned a paradigm shift in thinking across Europe about how society should include function.

And by the very end of the 19th century, groups known as Mutual Aid Societies began to form. These were small groups of people who would pull their meager savings and their resources to create capital that would benefit the group as a whole. This eventually led to Cooperative Credit Societies that we now call Savings and Loans or Credit Unions. Now, the core concept of these Mutual Aid Societies was a free democratic organization that acted in the interest of the members. This contrasted directly with the existing banking infrastructure which acted largely in the interest of their owners and shareholders. This was even worse in the 19th century when regulations were not as stringent as they became in later decades.

Now, Mutual Credit is another type of mutually beneficial economic network. And in this, the people agree to give credit to each other. And that credit can only be spent within that particular network. Now, this was a radical advancement because it required a very high level of trust between the people that were members of this group. No longer were they pulling their resources to form capital that benefited the group as a whole but rather, that capital was being lent out to specific members. And you had to trust them to use it properly and to repay it properly. Now, this trust system was guaranteed by a full transparency and accounting, which was a completely new concept. There had been no such demands placed upon the banks, the banks would never ever agree to it at this point in time so really, mutual credit brought in transparency. And that was the revelation, the revolution, if you will, of mutual credit societies. And these experiences really formed the foundation of what made digital currencies and cryptocurrencies possible. The Blockchain is a completely open list of all transactions and it’s the literal inheritor of these early systems.

The next major change in financial systems came about as the result of the Wall Street crash of 1929. The crisis led to a decrease in the circulation of currency, which in turn, increased the stagnation of the economy. Distrust in the banking system caused people to pull their money out and keep it safe at home instead of in the banks, and as a direct consequence as well, the banks didn’t trust the people enough to lend them any money. The result being, decreased liquidity. This distrust also led to some cities, regional governments, and even companies issuing their own alternative currencies. Sometimes, these were called script. Many of these currencies were intentionally designed to promote circulation and to penalize hoarding. It was a directory action to the decrease in the circulation of the primary fiat currency, particularly in the United States and major countries in Europe.

When a currency loses its value if it’s not used, it’s known as a demurrage currency. Now, several of the alternative currencies that were used in the Depression years were designed as demurrage currencies. Here’s an example from Germany. You see the three different notes here, the one shilling, the five shilling, and the ten shilling notes? Notice the stamps that are on those notes. What would happen here is when the original note was issued, there would be no stamps on it. But if that note was not spent within a certain period of time, it would actually decrease in value. And to keep the value, you would actually have to go out and purchase one of these stamps, which was equal to a fraction of the value of the note itself. And you’d have to stick that stamp on the note to retain the note’s value. This promoted you to continue to use this note and to use it quickly as opposed to holding it because it actually caused you money to hold it.

Now, the term, demurrage, just by the way a background information, is borrowed from the European Railway System, which used to charge a fee for railcars that were parked for long periods of time. So in other words, the cost of storage was higher than the cost of actually moving the railcar, which forced the transportation systems in the railroad companies to use their rolling stock. Now, you can think about demurrage in the context of money as negative interest. It’s a way of reducing the money supply and encouraging circulation. Why is this important? Because it showed that money can be controlled not just through interest rates but by other mechanisms that were able to affect the behavior of consumers.

The movement away from centralized authorities has always been led by those people who felt they were capable of organizing their own affairs. From the French and American revolutions to various struggles against centralized government, as people and systems became smarter, decentralization became a viable and an often successful option to the mainstream primary infrastructures. Now, starting in the 1970s, theorists and futurists began to predict that rapid technological advancement would inevitably lead to decentralization. There were number of books written this time on this subject. Two of the more popular ones were Alvin Toffler’s works, “Future Shock” and “The Third Wave.” But John Naisbitt’s Megatrends was also quite important as was E.F. Schumacher’s Small is Beautiful. This showed a dramatic shift in thinking. And what’s quite controversial at that time, it really seemed to focus more on local concerns and upon people as opposed to nationalized systems. Now, as a result of this, if these theories held true, all that was needed was the technology.

With that, we’re going to wrap up this pre-computer age discussion by taking a quick look at the summary chart. This chart shows the various types of alternative currencies that remain viable at the time of the pre-computer age. Some of these, it’s important to know, they are still actual in existence today. Now, you can stop this video at this point and look at this in detail if you want at your own leisure. The couple of things I’d point, barter and community exchange networks. These have been around forever. And still at present, there are more than 4,500 of these formal systems in use worldwide as we speak. Script has largely fallen by the wayside, but anytime there’s a significant dip in the national currency due to a financial crisis, we see script arrive and pop up again. And then, finally, we have urban currency systems, which were actually private currencies in this peak during the free banking era in the mid-19th century.

But remarkably, some still exist and remain vital. There are several cities in the US and Canada in particular that have urban currency systems. Ithaca, New York, Brixton, Bristol in the UK, Toronto and Vancouver in Canada all actually have private urban currency systems where the value of that urban currency’s paved against national currency and is oftentimes used even for tax payments within those city boundaries, quite interesting, early alternative currency systems. All of which hopefully give some context for what’s about to happen next, which is what we’re going to discuss in our next lesson that is Early Digital Currencies. Please join us for that lesson.