Money the Middleman

MONEY THE MIDDLEMAN

There’s a joke that the oldest profession is apple picking.

There would have been a time when there was no such thing as a profession.  No specialisation of abilities, with no special skill or talent for hire. So no trade.

A time when there was no such thing as trade? Hard to imagine, given the ubiquity of trading, buying and selling, in all of our current societies. Even in what we think of as primitive nomadic societies, trading occurs as things take on value and can be desired. But back far enough and no need for anything like even bartering, for bartering is a form of trade. “I’ll trade you this for that.” Like kids swapping comic books. I used to do that. I remember putting all my comics across the wide brick front fence and neighbourhood kids came by with theirs to compare and exchange. Maybe exchange is a synonym for trading. In prehistoric human cultures where needs were limited to basics and would have been served by one’s access to nature around them, for food and shelter. Each individual having access to the same resources. What you need, you go out and get. No one with more or less than anyone else. No one with anything different from anyone else.

But eventually, as humans developed the sophistication of the groups they lived in, developed skills in art and fabrication, expanded populations and territories, it would have become inevitable that someone came across someone else with something that they did not have and had no access to and wanted. Bartering, or swapping somethings of equal value, became the method of trade. The economy.

Chimpanzees share 98.6% of their DNA with humans. More than the difference between horses and zebras. Chimps trade. They often trade food for sex. Not unlike the Bible’s story of trading an apple for sex. Studies conducted at the Max Planck Institute for Evolutionary Anthropology have demonstrated that the neurological pathways activated during trading decisions in chimpanzees are remarkably similar to those in humans, suggesting that the cognitive foundations for economic behaviour preceded human civilization by at least 4 million years.

And there would naturally have been a time when there was no such thing as money. Even in its most arcane sense.

But after bartering, came an era in many societies where something became universally valuable. Something acting as a sort of middleman between trades. Cowrie shells come to mind. They were the first known use of an object as money instead of a commodity, going back at least 4.000 years and in use right up to the 1960’s in West Africa. Ghana’s currency the cedi is named after their word for cowries. They were everywhere, Africa, Americas, Asia, Australia. Not everyone used them though, Aztecs used cacao beans. In early Australian settlements colonialists used rum.

Interestingly Incas used labour as a form of currency. It was like working off a debt or doing a job for someone for pay. Like everyone alive today does. That bumper sticker says it all, “I owe, I owe, so it’s off to work I go.” In fact the economic system of the Incas was based on the control of labour. Making it a commodity, and manipulating its worth that way. A bit like a federal reserve controlling cash in circulation through minting and interest rates.

There is debate about this distinction of a cowrie shell as money versus being a commodity. Probably because they served as both. A cowrie shell could be saved and used to exchange for something else later, or it was also such an item of desire that they were transformed into something of added value, such as an adornment.

They have also been the cause of trade wars. When the British East India Company abolished the use of cowrie in preference for silver in 1805 in India, it contributed to the Paik Rebellion in 1817.

For something like a cowrie shell to catch on as a form of currency it has to have certain characteristics. Money must be durable, portable, uniform, acceptable, and limited in supply. It must display these characteristics across a wide population, everyone needs to see the same intrinsic value in it, and if helps if the thing is divisible.

Rarity becomes a leading characteristic. Being rare, whether because there is limited supply or because of difficulty of attainment, doesn’t matter. Cowrie shells never took on in Europe, but precious metals did. They are only thought of as precious because they became money. There is nothing especially precious about them. Astatine is the rarest element on earth, at any one time only about a gram in the whole Earth’s crust. So clearly another characteristic needs to be not too rare. And something else. Osmium for instance is rarer than gold, and more durable, a pretty blueish-grey colour, twice as dense as lead. But so hard it is almost unmalleable. Difficult at least in the early history of money to make into coins. Melts at over 3,000 degrees Centigrade compared with gold’s 1,064 degrees C.

Clearly what we now call precious metals met that Goldilocks point in Europe to become the preferred currency. Another quality comes into the story. Initially any bit of gold or silver would serve equally well as a form of money. If you found some, you had money. So control of it by the powers that be was solved by fabricating it into official coinage. If you found some gold, it was illegal to make it into a coin, but ironically you could sell it to buy some gold coins. That explains why jewels and gems rarely become currency, despite meeting most of the criteria. They cannot be controlled. A diamond is a diamond is a diamond, and impossible for a government or a treasury or a mint to control through fabrication into something like a coin.

Sometimes coins are what are called commodity money, where they are actually made of gold or silver so they carry their own innate guarantee of worth.

What about paper money? The oldest known paper money is from China’s Tang period, in the 7^th century AD, while the oldest coin so far found goes back to about 600 BC in Lydia now in Turkey.

Paper money has none of the characteristics of the other forms of currency like cowrie shells or silver coins. So how is it possible to be used and accepted as money?

The answer is that until recent times, it was treated as if it were gold. A sort of guarantee that it was worth its weight so to speak. Actually before that the guarantee was not gold but the promise of the king. Woe behove anyone who did not accept fealty to the king. So initially paper money was a promise. A bit like a cheque became a promise to pay. In fact stronger, it is an order to a bank to pay. And so it was with paper money. It was an order (by the king) to make payment, legal tender. You tender it for payment and it must be accepted. At times there arose a second level of separation in all of this. Around 1930 China for instance pegged its currency to the value of the US dollar which was pegged to the value of gold.

So why make paper money at all? If it is really just a substitute for something else? It is not durable, is not rare. But it is convenient and less able to be counterfeited. Convenience holds sway.

There is nevertheless an element of trust and faith in all of that and humans tend to be distrustful. So eventually and for a long time, the intrinsic value or gold came back into play, even with paper money. In fact gold never goes away, for people and governments. Both still hold hoards.

But surprise. Long before what is known as the gold standard there was the silver standard. As long back as 3000BC in southern Mesopotamia the Sumerians used silver to back up the value of their currency, weighted out in units of shekels, ultimately by around 300BC to become the coin known by the same name.

Good old Sir Isaac Newton changed everything. As Master of the Royal Mint in Britain, deciding gold was more valuable than silver and setting the world on the way to a gold standard. Of course gold and silver have no intrinsic value, it is just what we allocate to them. Just as a cowrie shell only has value if we say so.

Convenience continued to dominate thinking. Instead of backing every dollar up with a dollar’s worth of gold, US President Nixon, said in 1971 “trust my lips” trust me if I stop accumulating gold and just tell you that the dollar is worth a dollar regardless. That is a lot more convenient. No physical logistics to handle at Fort Knox. Just have faith. So now currency consists of paper and little else. Why trust it then? In fact you are ordered to trust it. You have no choice. An authoritative order is called a fiat and the world today runs on fiat currency. Money that has no underlying asset or commodity. You have to trust it.

Now comes a problem. Under a system like the gold standard, a paper note can be created each time more gold is collected. But with no backup how, is paper money made? Who does it and how is it regulated. Isn’t there a risk of inflation like in the old days when naïve governments just printed money willy nilly? The answer is a surprise and scary. Banks literally print money as they want. Back in the gold standard days, if you printed more money then the total in circulation was still only worth the value of the gold in store, so each note was worth less.

It turns out that the amount of physical money in circulation these days with electronic transactions and paperless transfers is only about a tenth of the total value of transactions at any time. So the government lets a bank “create” about ten times more money as the actual paper money they hold. Out of thin air.

It works like this. Banks create money primarily through the issuance of loans. This process significantly increases the amount of bank deposits in the economy.

How Loans Lead to Money Creation

Issuing Loans: When a bank provides a loan, it credits the borrower’s account with the loan amount. This action effectively creates new money because the borrower can now use these funds for transactions. Most money transactions these days are paperless. electronic, so having no new paper notes to support the loan is irrelevant. It becomes just entries in accounts.

Deposits Increase: The loan amount becomes a deposit in the borrower’s account, which is counted as part of the money supply. For example, if a bank loans $10,000, that amount is added to the borrower’s account, increasing the total deposits in the banking system.

Money Multiplier Effect: The banking system can further expand the money supply through a process known as the money multiplier. When the borrower spends the loan, the recipient deposits that money into their bank, allowing the bank to lend out a portion of those deposits again, creating even more money.

Constraints on Money Creation

• Reserve Requirements: Banks are required to hold a certain percentage of deposits as reserves. This limits the amount they can lend out. However, in many countries, there are no strict reserve requirements, allowing banks more flexibility in lending.
• Creditworthiness: Banks assess the creditworthiness of borrowers before issuing loans. This ensures that they do not lend excessively, which could lead to insolvency.

So money or currency has become little more than a concept.

At times authorities like the New York Transit Authority, and non-authorities like businesses such as Sears, issue coin-like tokens, to be used locally only. Sometimes they look too much like a legal coin and are regulated or banned. But regardless of legal status, since they serve for commercial transactions, even just in their own community, they are a form of currency. They are essentially no different in practice to things like coupons and loyalty programs.

Osborne Coinage in Cincinnati for instance is the oldest USA private mint specialising in custom coins, tokens and medallions.

The inevitable happened. Tokens themselves can become conceptual so it is no surprise that someone invented and issued virtual tokens.

Wikipedia ways, “Virtual currency, or virtual money, is a digital currency that is typically unregulated, issued and usually controlled by its developers, and used and accepted electronically among the members of a specific virtual community as part of a virtual economy.”

Virtual or digital currencies which includes cryptocurrencies are not real currency and are not legal tender, but are not necessarily illegal. They are not tied to any fiat currency so have no guarantee. The USA treats virtual currencies not as currencies but as property, just as you might use say a valuable painting as payment for something else. Almost comes round full circle because it sounds like bartering to me.

Cryptocurrency is a type of digital asset but different in that they use what is called a distributed ledger, such as blockchain technology to enable a secure transaction. The transaction is distributed, that is, it is replicated in several places. That does two things. It makes the transactions of cryptocurrencies foolproof. Hard to falsify something distributed  everywhere. And the encryption component in turn makes the transaction untraceable, the second thing.

I’ll go back a bit to fundamental economics here. How wealth is created from work product. Wealth can be thought of as the value-add from creating something that others want. Not from creating something for themselves. When a producer transforms raw materials and labour into goods or services that someone wants, it generates a profit from the value-add, which is the wealth. Sounds like something from nothing but it is more like the conservation of energy because it is not from nothing. The labour and the thinking going into it emerge as profit. This concept comes into play when thinking about crypto-mining. Turning the phenomenally complex and time and resource consuming work product of the decryption process into value-add in the form of new Bitcoins.

And so it was with Bitcoin, the most known cryptocurrency. In the beginning, the privacy aspect of cryptocurrencies, which was thought to be its main feature, almost brought it undone. David Chaum conceived of the digital cash concept of systems using blind signatures in 1982 and after a short-lived trial of eCash by his company DigiCash in 1989 through the Mark Twain Bank in St Louis, dropped the idea when only 5000 customers took it up. They saw no benefit to the secrecy of transactions. Now the anonymity is the big thing and the cause of complex security issues by nefarious parties using cryptocurrencies.

This effort was followed by theoretical work, particularly the encryption methods, like the b-money from Wei Dai in 1998.,”…a scheme for a group of untraceable digital pseudonyms to pay each other with money and to enforce contracts amongst themselves without outside help.” Wei Dai was the first cryptologist contacted by Satoshi Nakamoto, a pseudonym, when he/she/it developed Bitcoin in 2008.

A good idea is a good idea. Money was a good idea. Cryptocurrencies are a good idea. There are umpteen cryptocurrencies in circulation now, if that is the right word. An interesting one is Peercoin by Scott Nadal and another pseudonym called Sunny King because it uses proof-of-work as the basis of generating new coins. A true value-add proposition. So much so that everyone has jumped on the bandwagon. Even countries have now decided to classify them as legal tender.

Like all new new things, (see the blog of that name on Blackjay), cryptocurrency has seen several market crashes. Think of Sam Bank-Man Fried. On 11 November 2022, FTX Trading Ltd., a cryptocurrency exchange, which also operated a crypto hedge fund, and had been valued at $18 billion, filed for bankruptcy. The financial impact of the collapse extended beyond the immediate FTX customer base, as reported, while, at a Reuters conference, financial industry executives said that “regulators must step in to protect crypto investors.” Cryptocurrency saw a significant decline in 2026, where Bitcoin lost more than $1.2 trillion in value since its peak in October 2025, dropping below $64,000. It is yet to be seen if cryptocurrencies turn out to be what Bill Gates describes as “greater fool theory.” Speaking of which, having once dismissed bitcoin as “based on thin air”, Donald Trump now revels in his role as “crypto president”.