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This is a chapter from the book Token Economy (Third Edition) by Shermin Voshmgir. Paper & audio formats are available on Amazon and other bookstores. Find copyright information at the end of the page.
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This chapter touches on the history and most important aspects of money and credit and explains how both topics are intertwined social constructs that are deeply rooted in the value system of our economic networks—the communities, nation-states, or digital tribes we are a part of. With the emergence of blockchain networks, money and other tokenized assets, including tokenized credit and lending services, have become a native feature of the Internet. A good understanding of what constitutes money and credit is, therefore, a prerequisite for being able to assess and co-create this emerging token economy.
Money and credit are deeply interconnected constructs within our economic systems. They serve as the foundation for financial transactions and have evolved over time to meet the needs of growing economies and changing technologies. While money serves as a medium of exchange, unit of account, and store of value, credit represents the promise of future payment and a premium on top.
Historically, the concept of money and credit has shifted from simple and more distributed mutual credit systems or commodity-backed systems, where the value of a currency was tied to physical goods like gold or silver. As economies grew more complex, money and credit needed to evolve to support larger and more intricate systems of trade, giving rise to centralized institutions that managed the issuance of money and credit. Today, fiat currencies are the dominant form of money. They are government-issued and no longer backed by physical commodities. More sophisticated and versatile financial products have also emerged over time, which are managed by an array of private or state-owned banks.
In the context of Web3 and blockchain networks, the role of money and credit is undergoing another transformational process. Tokens, representing both money and credit, can now be integrated directly into the infrastructure layer of the Internet, bypassing traditional financial intermediaries. This shift is particularly significant because it allows for a more fluid, open, and collectively managed system where value can be transferred and verified across borders without relying on centralized authorities.
While it has become widely accepted that it is the responsibility of the state to have a monopoly over the issuance and management of a currency used within the boundaries of a nation-state, this was not always the case. The idea of a state monopoly over the issuance of money is a product of historical social and economic developments, combined with practical necessities and the social consensus around money. The narrative around what constitutes money has been predominantly driven by those in power over local and global financial systems, who actively or passively sought to protect their own interests.
In fact, economic scholars differ in their views on the topic. Those who do not accept the monopoly of the state to issue and govern money are often considered “heterodox.” Heterodoxy is a Greek word that refers to opinions or doctrines that are not in line with an official or “orthodox” position. Both terms are traditionally used in religious contexts. From a mainstream economics point of view, heterodox economics refers to basically every school of economics that is not in line with “Neoclassical economic theory.” “Austrian economics,” “Political economy,” Ecological economics,” “Behavioral economics, Keynesian economics,” “Feminist economics” or “Marxian economics” are all considered heterodox, even though they have little in common with each other.
Carl Friedrich von Hayek—one of the more renowned economists of the 20th century—is an example of an economic scholar who disagreed with the monopoly of the state over money creation. While Hayek is considered to belong to the “Austrian School,” his views on many topics—such as monetary policy—differ from those of other Austrian economists. Hayek promoted a special form of a free-banking system of competing private fiat currencies without the need for a central bank that holds a monopoly over the issuance of money. He suggested that private financial institutions take over the functions of central banks, such as the important function of acting as the “lender of last resort,” but he did not rule out that central banks would remain and fulfill certain monetary policy functions, at least in the short term. Hayek was not the first economist to promote such ideas, but he is often cited by the crypto community for his ideas around the separation of state and money.
The idea of separating state and money was also omnipresent in the communities working on financial cryptography that led to the emergence of Bitcoin. In the context of cryptocurrencies, this idea was probably first articulated in 2015 by Erik Voorhees, the founder of one of the earliest token exchanges. He made an analogy between the freedom to choose one’s money and the freedom to choose one’s religion. Voorhees stated that money and financial freedom are fundamental aspects of our lives and that the type of monetary system we live in affects how one’s life unfolds, claiming that it is therefore just as—if not more—important than freedom of religion. He argued that the choices one makes about money dictate the ramifications of one's life and that “to have an institution like money so controlled by a central entity—by a monopoly—is absurd; it is immoral.” For many centuries, the concept of separation of church and state was inconceivable, and it was considered heresy when philosophers such as John Locke proposed it in the 17th century. The separation of money and state might be the next step in the separation of state powers.
Another thing worth mentioning in this context is that the monopoly or exclusive responsibility for money is not part of most constitutions worldwide—if any at all. There is no legal provision at a constitutional level that the state should have that power. The current practice is based on an informal social consensus, which often resulted from banking practices that evolved over centuries and adapted to geopolitical and global economic agreements. In some countries, these practices have become institutionalized through primary legislation, more specifically by central banking laws, but not in all countries and, for the most part, not at a constitutional level.
The history of money is as old as human civilization itself, evolving from rudimentary forms of debt and exchange-based systems into complex systems designed to support trade and economic expansion. It is widely believed that early societies began with barter, a direct exchange of goods and services. However, barter poses significant limitations, notably the "coincidence of wants" problem. This refers to the improbability that two parties—each of which has different goods or services to offer—can agree on a deal unless each party wants the specific goods or services the other party offers at the same time.
A universal asset of value as a medium of exchange mitigates this problem. Shells, precious metals, or livestock were the first universal assets used. Over time, more neutral artificial mediums of exchange developed, which were referred to as “money.” Money has proven to be an efficient technology for intermediating the exchange of goods and services, providing a tool for comparing the values of dissimilar objects.
While there is merit in having a universally accepted medium of exchange, heterodox economists do not necessarily agree that pure barter economies or gift economies ever existed. One of those skeptics was anthropological economist David Graeber. In his controversial book Debt: The First 5000 Years, he argues that the concept of debt or credit-based accounting in the form of social debt probably predates money-based or barter-based transactions. While he acknowledges that money- and barter-based economic transactions also existed, Graeber argues that they were limited to low-trust situations, typically involving a set of people who did not know each other and therefore did not consider each other creditworthy. Graeber concludes that a "military–coinage–slave complex" replaced the social debt concept when city-based civilizations started to pay mercenary armies with money they created to loot other cities and enslave their citizens to work elsewhere for free. Mainstream monetary theory also connects money to debt. It is assumed that money needs certain properties to serve as an adequate medium of exchange, store of value, and unit of account in which debt can be denominated.
In modern economies, the dominant type of money or currency is “fiat money.” Before modern-day fiat currencies, other forms of money and more or less formalized mutual credit systems were in widespread use: