The financial system as we know it is changing. Money is evolving and people are using new currencies for exchange and store of value. Money evolves over time out of necessity to meet the needs of a changing society.
Our financial system is changing because our world is changing. As more of the planet comes “online”, we are able to communicate with more people faster. With a couple clicks of a button, you can send money almost anywhere in the world.
But the current system is not without its problems. Corruption is rampant. Fees for simple funds transfers can be cumbersome. Remitting money to other countries takes time. Accounting shenanigans lead to a distrust of those in power.
Let’s explore the evolution of money to see how we arrived at our current system and learn what the future has in store.
The first exchanges of value pre-dated ledgers and accounting. When people’s needs were limited, barter served as a medium of exchange. If your neighbor had something you needed, you would trade something he needed. Both parties received value from the exchange. In a barter system, goods are exchanged directly from one party to another without an intermediary.
Barter is limited in usefulness and quickly loses its value when there are too many parties trying to exchange too many things. A barter system is more valuable to less people, assuming those parties have goods to exchange directly with one another. As society evolved and people dispersed to different geographic areas, the evolution of money took a new form. Commodity money and metals were introduced as a way to exchange value.
The barter system gave way to commodity money and people began to exchange various items, such as shells, salt, animal hides, tobacco, slaves, axe-heads, etc. However, while commodities performed the basic functions of money, they had some major drawbacks.
Using commodities as a means of exchange made it difficult to borrow and lend (can I borrow this pound of salt to lend out to my friend? I’ll pay you back in interest…3 new axe-heads).
Further, it was difficult to measure and store the value of the goods as there was no objective scale. Even among shells, arrowheads, etc the commodities were not perfectly uniform. Finally, transporting commodities made it difficult to increase a volume of trade across a large number of people or across a wide geographic region.
Gold and Silver
The evolution of money continued as humanity continued its progression. Commodity money evolved into metallic money, such as gold, silver and other precious metals. Gold and silver are easy to handle, divide into smaller (still valuable) chunks, or can combine with other small chunks to make larger chunks. The metals were easy to identify and hard to counterfeit. Metals are “precious” because they are rare.
The earliest known use of gold as money was 643 B.C in Lydia (modern day Turkey). The first coins were made of electrum, a naturally-occurring composite of gold and silver. By 540 B.C., the Lydians separated gold from silver making the first true gold coins. At the time, the value of the coin was based on the value of the metal contained in the coin itself. Perhaps this was a precursor to the twist on the Golden Rule – he who has the gold, makes the rules.
This is also why Portugal, England, and Spain sent Columbus and other explorers out into the world…they needed more gold to remain the world’s superpowers. Italy issued the ducat and England issued the florin in 1284 A.D. The two would remain popular currencies for the next 500 years.
Many countries wanted to standardize transactions and adopted the gold standard to assist increased global trade. The gold standard guaranteed the government would redeem any amount of paper money for its value in gold. In a way, it kept the government honest and from overspending.
On the gold standard, paper currency now had true value tied to something real. In 1971, President Richard Nixon took the United States off the gold standard, ultimately causing the purchasing power of the dollar to diminish through repeated overt (and covert) inflation.
The evolution of money continued with the introduction of paper notes. Paper notes were issued to act as an IOU for the metals that were originally too cumbersome to carry. The first paper bills were used by the Chinese as early as A.D. 618, though the notes were issued by private parties instead of a central authority.
Marco Polo introduced paper currency to the Europeans the 13th century. Bank notes date back to the 14th century, and recognized the right of a holder to collect his precious metals from the banker holding them.
Commercial banks started issuing their own notes in the 19th century. However, this was confusing and soon Central Banks from each country stepped in to take over creating and distributing the money supply for their citizens.
The dollar became the official currency of the US in 1785. In 1861, the US released its first paper currency (nicknamed greenbacks) to help finance the Civi War. However, after the war counterfeiting became rampant with an estimated 1/3 of the bills in circulation being fake. Abraham Lincoln created the US Secret Service (yes that secret service) in 1865 to crack down on counterfeiters so they couldn’t destroy the US financial system.
Convenience, filth and demise
Paper currency is all about convenience – namely, the ability to carry promissory notes instead of precious metals. Taking convenience to the next level, John Shepherd-Barron invented the first Automatic Teller Machine (ATM). He pitched the idea to Barclay’s Bank of London in 1967 where it was implemented immediately.
Paper money is filthy! A 2017 study showed that over 80% of US bills contain traces of cocaine. As convenience goes digital, most Americans don’t think cash is king anymore…at least not in its current paper form. According to a Gallup poll released in July 2016, most Americans foresee the death of cash in their lifetimes.
Paper money is made of paper, and therefore has a finite lifespan. In fact, a typical US dollar bill only lasts about 21 months. Additionally, paper money isn’t practical for large transactions or consecutive transactions where a lot of cash is needed.
Diner’s Club created the credit card in 1950 to solve this issue. The cardholder could purchase goods and services based on credit he would then pay back each month. The first credit cards were really “charge cards”, meaning they were expected to be paid in full each month. Credit cards didn’t catch on quickly initially. Originally only about 20,000 people signed up for the Diner’s Club card. However, the portable plastic cards soon gained popularity. American Express released its own charge card in 1958. Within five years, over a million American Express cards were in use at 85,000 merchants worldwide.
Banks were next to release their own cards tied to cardholder accounts. The first bank card comes from Bank of America, and debuted in 1966. Unlike the first charge cards, these bank cards were truly credit cards. The cardholder is allowed to carry their monthly balance forward for a small finance charge. Credit cards are everywhere since convenience takes center stage. Today, studies show 7 in 10 Americans have at least one credit card.
Our modern culture is already comfortable with digital cash. Cash is becoming more and more obsolete. In fact, 92% dollars in circulation digital dollars circulated through plastic money like a credit or debit card. Only 8% of US dollars in circulation are actually physical paper money.
Today, we spend a lot of time on our computer or mobile device. It makes sense the next step in the evolution of money would be a digital currency. Satoshi Nakamoto’s groundbreaking whitepaper introduced Bitcoin to the world in October 2008.
While digital convenience and screen time is at an all-time high, trust is at an all-time low. Only 27% of Americans trust banks. The American public trust of the government is lower than ever. According to the Pew Research Center, “Only 18% of Americans today say they can trust the government in Washington to do what is right “just about always” (3%) or “most of the time” (15%).”
It’s no wonder Bitcoin is a welcome haven. Bitcoin is a trustless currency, meaning no central authority governs it and no central authority can inflate or compromise its integrity.
Principles of Sound Currency
Aristotle defined five principles of sound currency:
- Scarcity: the currency must have a limited supply
- Fungibility: able to replace with an identical item, also defined as mutually interchangeable
- Transferability: easily transferred between owners
- Divisibility: can be divided into smaller and smaller units
- Durability: can survive the test of weather and time without disappearing
Bitcoin adheres to all five principles. of sound currency. Bitcoin is scarce, only 21 million coins will ever be mined. This is written directly into the Bitcoin algorithm and Bitcoin cannot be inflated. Bitcoin is fungible and can be interchanged. One BTC can be exchanged for another BTC. Bitcoin can be easily transferred between owners, often through your computer or even smart phone. Bitcoin can be divided into smaller units called Satoshis. A single Satoshi= 0.00000001 BTC. Bitcoin is durable. It exists over a network of thousands of computers and can survive the test of time.
The Evolution IRA
Digital money and cryptocurrency are here to stay. Some of the world’s brightest minds work to keep the network safe and online. Developers work on ways to further integrate cryptoassets into our financial system and our life. Industries from real estate to finance are working on ways to incorporate blockchain technology into their business plans.
We designed the Evolution IRA to meet the needs of our changing financial system. For decades you’ve been able to hold gold money, paper money, and traditional assets in your retirement plan. Today, you need the ability to hold Bitcoin and other cryptocurrencies in your retirement plan. Bitcoin continues to gain adoption and while the price is extremely volatile, we believe the value of Bitcoin and other cryptocurrencies will continue to go up over the long term.
Our team created an integrated solution that handles the entire process form purchase to storage so you can hold Bitcoin and cryptocurrency in your IRA.
The financial system is evolving. Shouldn’t your retirement account evolve, too?