Innovation and Cryptoventures Why Money Campbell R Harvey

Innovation and Cryptoventures Why Money? Campbell R. Harvey Duke University, NBER and

Campbell R. Harvey: 2019 2

Purposes: Primary • Unit of Account: A way to compare the value of various goods and services • Medium of Exchange: Allows for non-barter transactions. Secondary • Store of Value: Allows value to be retained – even if partially – rather than complete decay (e. g. storing food). • Transfer of Value: Ease of transfer of value and to defer value. Campbell R. Harvey: 2019 3

Characteristics Traditional characteristics: • Durability: Withstand repeated use (coins, paper, gold) • Portability: You can carry around • Divisibility: Fractional units • Uniformity: Versions of the same currency have identical value • Limited Supply: Unlimited supply would mean zero value • Acceptability: “This is legal tender for all debts, public and private” • Stability: If unstable, people will look for alternatives Campbell R. Harvey: 2019 4

The Communist Dream The Principles of Communism, 1847 • “Finally, when all capital, all production, all exchange have been brought together in the hands of the nation, private property will disappear of its own accord, money will become superfluous, and production will so expand man so change that society will be able to slough off whatever of its old economic habits may remain. ” Campbell R. Harvey: 2019 https: //www. marxists. org/archive/marx/works/download/pdf/Manifesto. pdf 5

The Communist Dream A World without Money, 1975 -6 • “The new people will resemble their hunting and gathering ancestors who trusted in a nature which supplied them freely and often abundantly with what they needed to live, and who had no worry for the morrow, over which in any case they had no control. ” • L'homme nouveau se rapprochera de son ancêtre chasseur collecteur qui faisait confiance à une nature fournissant gratuitement et souvent abondamment de quoi vivre, qui ne se souciait pas d'un lendemain sur lequel de toute façon il n'avait pas prise. L'homme de demain aura pour nature le monde qu'il aura façonné, l'abondance naîtra de ses propres mains. Il sera sûr de lui car il aura confiance en sa force et connaîtra ses limites. Il sera insouciant parce qu'il saura que demain lui appartient. Campbell R. Harvey: 2019 http: //www. reocities. com/demainlemonde/Un_monde_sans_argent. pdf 6

The Communist Dream But… • Even North Korea uses money! Campbell R. Harvey: 2019 7

The Communist Dream Further… • Hunter-gather life style is no easy life style • “Five years ago, members of the Nukak-Maku unexpectedly wandered out of the Amazonian rainforest at San José del Guaviare in Colombia. The Nukak were a tribe that time forgot, cut off from the rest of humanity until this sudden emergence. Subsisting solely on the monkeys they could hunt and the fruit they could gather, they had no concept of money. Revealingly, they had no concept of the future either. These days they live in a clearing near the city…. Asked if they miss the jungle, they laugh. ” Niall Ferguson, The Ascent of Money Campbell R. Harvey: 2019 8

The History of Money Not just coins • 3300 BC Clay tokens in Mesopotamia • “In the Mesopotamian cities, there were 16 main types of tokens and dozens of sub categories for things like honey, trussed duck, sheep's milk, rope, garments, bread, textiles, furniture, mats, beds, perfume and metals. ” Campbell R. Harvey: 2019 http: //factsanddetails. com/world/cat 56/sub 363/item 1514. html 9

The History of Money Not just coins • 2800 BC Silver ring money in Mesopotamia • Others used tin, copper or bronze • Allowed for trade within a city and between cities Campbell R. Harvey: 2019 http: //factsanddetails. com/world/cat 56/sub 363/item 1514. html 10

The History of Money Not just coins • 1650 BC Clay tablets in Mesopotamia • “Babylonian town of Sippar. A clay tablet found there was inscribed with this promise: At harvest time, someone named Amil-mirra would pay 330 measures of barley to whomever held that tablet. ” • First “promise to pay” Bitcoin: And the Future of Money, Jose Pagliery Campbell R. Harvey: 2019 11

The History of Money Paper money • Fiat money invented in China • ~600 AD China T’ang Dynasty “promises to pay” (hence the term promissory notes) • First record of metallic reserves around 1000 AD, where reserves were 3/7 ths of the face value. John F. Chown, A History of Money: from AD 800 Campbell R. Harvey: 2019 12

The History of Money Europe • Roman coinage, the silver denarii, was used well after the fall of the Roman Empire. • However, there was a shortage of silver in Europe. Why? because of deficits with southern Mediterranean and Near East. • Alternatives to coins arose for small amounts (like squirrel skins and peppers) Campbell R. Harvey: 2019 13

The History of Money Europe • Discovery of silver in New World solved the shortage problem • 170 tons of silver heading to Castilian monarchy per year • Spanish pieces of eight used outside of Spain – so a global currency • Inflation resulted. In 100 years, the price of food increased 7 X Campbell R. Harvey: 2019 14

The History of Money USA • Federal Reserve Bank relatively new – set up in 1913 • Until that period, essentially “free banking” • Over 30, 000 banks in 1922 – many undercapitalized • 1933 deposit insurance introduced during Great Depression • Highly fragmented system; the first state to allow interstate banking - 1976 Campbell R. Harvey: 2019 15

The History of Money Rise of Banking • Late 1300 s the Medici established modern banking • Banking spread to northern Europe, Amsterdam Exchange Bank set up in 1609, resolved problems that merchants faced with multiple currencies. 100% reserve ratio. 100% commercial transactions. • Swedish Riksbank 1656 did deposits as well as lending. Fractional reserves • Bank of England 1694. Granted monopoly power. 1742 was able to issue promissory notes that did not bear interest. Designed to help government with financing. Campbell R. Harvey: 2019 16

The History of Money Fractional reserves increase money • Money multiplier results because a deposit is not 100% held at a bank, some is lent out and the person that borrows, deposits at another institution, …. • M 0 (monetary base or high power money) = total liabilities of central bank (cash plus reserves of private sector banks at the central bank) • M 1 (narrow money) = cash in circulation + demand deposits Campbell R. Harvey: 2019 17

The History of Money Gold or commodity-based currency not necessarily a solution • Countries choose when to be on gold standard and when to abandon it • US is a good example • Illegal to hold gold from 1933 to 1971. Campbell R. Harvey: 2019 18

The History of Money US in and out of gold standard Campbell R. Harvey: 2019 Data source: U. S. GDP deflator from Johnson and Williamson (2011). “Currency regime” labels from Elwell (2011). See Erb and Harvey (2013). 19

The History of Money Gold also subject to inflation • Just as discovery of new world gold led to high inflation, technological change will dramatically increase the supply of gold Campbell R. Harvey: 2019 20

The History of Money Gold also subject to inflation • Just as discovery of new world gold led to high inflation, technological change will dramatically increase the supply of gold Near-earth asteroid Eros might have 125, 000 mts (Science, 2009). That equals all gold ever mined on Earth. Campbell R. Harvey: 2019 21

The History of Money Pure fiat currency is a bubble • US dollar, for example, has three features: • Legal tender • Government can tax • Government can incarcerate you if you do not pay tax Campbell R. Harvey: 2019 22

The History of Money Pure fiat currency is a bubble • Nevertheless, any fiat currency is a bubble – the currency only has value because people believe it is valuable • There are plenty of historical examples of when faith was lost in a currency Campbell R. Harvey: 2019 23

The History of Money Hyperinflations November 2016, Venezuela becomes 57 th entry Campbell R. Harvey: 2019 24

The History of Money Currency does can exist without government • Gold is the traditional example – but gold has uses • Cigarettes used in POW camps as medium of exchange • Other examples include cowrie shells and peacock feathers Papua New Guinea Campbell R. Harvey: 2019 China 25

The History of Money Iraqi Swiss dinar • Iraqi Swiss dinar was the currency of Iraq until the first Gulf War in 1990 (plates made in Switzerland, printed in the UK) • In 1991, Iraq was split in two with Saddam Hussein in the south the Kurds in the north • Because of sanctions, could not import dinars so Saddam ordered the printing of a new currency http: //people. ischool. berkeley. edu/~hal/people/hal/NYTimes/2004 -01 -15. html Campbell R. Harvey: 2019 26

The History of Money Iraqi Swiss dinar • In May 1993, the Central Bank of Iraq announced that citizens had three weeks to exchange old 25 dinar notes for new ones Campbell R. Harvey: 2019 27

The History of Money Iraqi Swiss dinar • However, old Swiss Dinar continued to be used in the north. • Saddam cranked the printing press to finance regime and soon the exchange rate was 300 Saddam dinars=1 Swiss dinar Campbell R. Harvey: 2019 28 See Mervyn King, http: //www. bankofengland. co. uk/archive/Documents/historicpubs/speeches/2004/speech 208. pdf

The History of Money Iraqi Swiss dinar • However, old Swiss Dinar continued to be used in the north. • Saddam cranked the printing press to finance regime and soon the exchange rate was 300 Saddam dinars=1 Swiss dinar Campbell R. Harvey: 2019 29

The History of Money Iraqi Swiss dinar • Key insight is that Iraqi Swiss dinar had no official backing yet it was accepted as money – because people were willing to accept it as money. • Interesting related story with the introduction of the Brazilian “unit of real value” in 1992 when inflation was running at 80% per month. http: //www. npr. org/sections/money/2010/10/04/130329523/how-fake-money-saved-brazil Campbell R. Harvey: 2019 30

Recap: History 9000 BCE Barter • Market in Egypt exchanging goods, i. e. cows for sheep http: //techcrunch. com/2016/01/21/barter-to-bitcoin-a-story-of-money-and-blockchain/#. yf 9 zg 3 w: id 5 P Campbell R. Harvey: 2019 31

Recap: History 600 BCE Coins • In Lydia Campbell R. Harvey: 2019 32

Recap: History 1290 Banknotes • Marco Polo introduces the idea to Europe (originates in China) Campbell R. Harvey: 2019 33

Recap: History 1871 e-Money • First Western Union money transfer Campbell R. Harvey: 2019 34

Recap: History 1950 Credit Cards • First credit card is Diners Club Campbell R. Harvey: 2019 35

Recap: History 1967 ATM • First ATM introduced in north London by Barclays Bank Campbell R. Harvey: 2019 36

Recap: History 1983 Telephone Banking • Bank of Scotland introduced Homelink which is the first application of Internet banking Campbell R. Harvey: 2019 37

Recap: History 1990 Internet Banking • Began to become widespread in the US Campbell R. Harvey: 2019 38

Recap: History 1997 Contactless Payment • Mobil introduces Speedpass at gasoline stations Campbell R. Harvey: 2019 39

Recap: History 2005 Chip and Pin • Introduced with credit cards Campbell R. Harvey: 2019 40

Recap: History 2009 Bitcoin • Programmable money introduced Campbell R. Harvey: 2019 41

Recap: History 2014 Apple Pay • 40% of US retailers have capability for contactless pay Campbell R. Harvey: 2019 42

Recap: History 2017 Blockchain • All leading banks have blockchain initiatives Campbell R. Harvey: 2019 43

Future 201? Back to Barter • Cross-blockchain trading of objects • Billions of bilateral exchange rates • Still need some way to store your wealth • Open question of whether currency – as we know it, either in fiat or crypto, is necessary Campbell R. Harvey: 2019 44

Summary Campbell R. Harvey: 2019 45

The History of Money Conclusion • All fiat currency is a bubble. • Bubbles need not burst – they can be rational and long living • All cryptocurrencies are bubbles. • If someone dismisses a cryptocurrency saying it is a bubble, it is likely they do not understand basic monetary economics. Campbell R. Harvey: 2019 46