Money — Arising from Necessity

21.08.2018

Spinning off from my prior article on noble metals and other value protocols, this one will explore a number of other historical instances of when something unexpected and unconventional rose to become money, and in some cases even legal tender - full legal recognition of properties that enables for meeting a financial obligation. I want to show in a simple and pedagogical way that money can arise naturally, with or without the blessings of the state, and it can take any form as long as it has certain properties that before only existed in the physical world, but which today through Bitcoin (or more specifically the Nakamoto consensus) can exist digitally as well.

Depiction of a Spanish silver mine in Americas. Production was cheap and abundant due to forced African and Native American labor. 

In a Time Magazine excerpt from Sharon Ann Murphy's 'Other People's Money: How Banking Worked in the Early American Republic', the author describes a situation in which good money was desperately lacking in colonial America. The mother country Britain was on a gold- and silver standard, yet production of such metals was not widespread in the colonies. On top of this, colonists were often paid in supplies provided by the company store, and so rarely had real gold or silver coins near at hand to spend. When they did have coins, often in the form of the Spanish dollar obtained through trade with Mexico and the West Indies, it was promptly used to pay for the trade deficit with Britain. It is around this time that some crafty colonists adapt a Native American way of trading - with wampum shells. These shells became legal tender in Massachusetts until the British saw it fit to end that practice. And even without that intervention, nature and the innovativeness of the settlers would have put a stop to the money protocol as new harvesting techniques, far better than those used by the wampum producing Narragansetts tribe, developed that increased wampum production considerably.

Tobacco barrels exported from Jamestown, Virginia. This tobacco was initially too harsh, leading Virginians to import and grow seeds from the Caribbeans instead. 

Mainly in Pennsylvania, New York, New Jersey, Delaware, and Maryland, land ownership contracts was introduced as successful yet highly indivisible money. Land was something the colonists had a lot of, and the possibility to monetize it was tempting enough. In the southern colonies, money was lacking as well despite the closeness to Spanish-controlled silver mines. As a logical continuation of what they were mostly producing there, tobacco leaves started circulating as money and the commodity was even elevated to legal tender. These leaves were divisible and, with a rigorous inspection system eventually applied to most tobacco warehouses, quite recognizable as being of quality. Yet they consisted of organic material and were obviously not as durable as gold, silver or even wampum. The temporary solution was money printing in the form of redeemable tobacco warehouse receipts. With the introduction of this commodity paper money, counterfeit notes was yet another aspect to control for. Another large problem with tobacco money is obvious the non-restriction of total supply, as nature is not making it hard enough to produce more of such a commodity. Despite such weaknesses, these innovative solutions to a problem mainly imposed by power proved temporarily successful.

Depiction of a sugar plantation. Enslaved Africans harvested the sugar canes and then brought them to sugar mills for the refinery process. 

Attentively observing the success of the monetization of tobacco, the colonists of Barbados made that commodity legal tender as well. Cotton was also monetized, and lastly and most importantly, sugar - the main produce of the island. In 'Tropical Babylons: Sugar and the Making of the Atlantic World, 1450-1680' by Stuart B Schwartz, he describes the power of law assigned to the new sugar money, as well as an established common custom - sugar had probably been used as barter money for a long time already. Fees owed to the island government could after the new legal tender laws be paid in sugar. The commodity is highly durable if not exposed to water, highly divisible and hard to counterfeit. Again, the weakness of such money is of course its abundant future supply should its price suddenly increase. Yet this money was successful and better than the alternative - a coin starved society that could not prosper due to the lack of a functional value protocol.

The Beaver is depicted in the Hudson's Bay Company's coat of arms. 

As we travel north, up to Canada, there are various examples of money that sprung in to life to standardize and facilitate trade. As European fishermen dried their catches on land - a process that took weeks - more and more communication with indigenous people in those areas was established. The fishermen offered metals and clothing in exchange for furs and fresh meat. Furs sold for high prices in Europe and so a lucrative trade network was slowly established with roads, forts and other logistical necessities. A result of changing fashion trends, the price of beaver pelts exploded in Europe, which in turn resulted in fierce competition and even war over the resource. The fur trade with native populations became so extensive that the Hudson's Bay Company minted the Made Beaver Coin. One such coin was redeemable for one prime beaver skin in good condition, and before long many prices were denominated in Made Beaver or fractions of it. It is easy to see the advantages of such standardization as it helps to solve for the 'coincidence of wants' problem that probably ran rampant with the barter based trade. It is also easy to see what could go wrong; who controls the company's minting activities?

A print from 1845 depicting an Arab trader, using cowrie shells for barter. 

Before ending the article by tying it together with the Bitcoin phenomenon of money, I want to bring up one of many examples where the money holds no 'intrinsic' value as opposed to money based on commodities that warm or feed people, or can give them other enjoyment. Cowrie shells were collected mainly on the Maldive Islands, Sri Lanka, Borneo and along the Malabar coast. For obvious reasons, such shells where found in and in near proximity of the ocean. As we know that (a degree of) scarcity is required for something to properly take the form of money, it should come as no surprise that these shells were used as money in places such as in-land China and Tibet. The Tibetan mountains have no native animals that could help substituting the cowrie shells which made such shells a relatively scarce commodity. In such far-away places their scarcity provided fertile ground for a budding value protocol as a larger market tried to figure out the correct prices. Mass collection or mass production was ultimately inevitable, forcing economies that utilized this value network to change certain dynamics of the protocol. In China for example, cowrie shells made of metal have been found, possibly indicating that the abundance of shells forced a change on the physical nature of the money.

Bitcoin mine in Inner Mongolia. An abundance of cheap electricity from hydroelectric power plants made such ventures profitable. 

Bitcoin resembles the examples outlined above in one way or another. The scarce money is 'dug up' by entrepreneurs all around the world, without any type of permit. This new value protocol arose from necessity in the sense that individuals craved money with known and restricted supply, with properties of permissionlessness, good transportability, confiscation-, freeze-, or counterfeit resistance, and a high divisibility. In other words, people wanted money with the property of decentralization and resulting minimization of control structures and other attack surfaces that could be used to disrupt its good properties listed above. The network has value for the same reasons totally useless wampum clams had value; wealth always needs to be stored on a value protocol, and on a free market, owners of wealth will look for protocols with properties that saturate their demands for the supply stability, security and usefulness that Bitcoin facilitates. When an arab trader carried his bag of cowrie shells, he probably understood that the total supply of cowries increased for each day, but having few choices in the matter, he used them anyway.