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Authored by Michael Matulef via BitcoinMagazine.com,

The nature of money is tragically one of the most unexamined and vital questions in modern society. Over the course of history, different monetary systems have risen and fallen as technology progressed and new forms of money emerged that were superior to what came before.

To help us understand money, we must examine the question: “who controls the ledger?” As we explore the technological history of money and its various incarnations, from informal social credit to commodity-backed systems, we can gain insight into how control over the monetary ledger impacts individual liberty, economic prosperity, and human flourishing.

In the Austrian tradition, figures like Carl Menger, Ludwig von Mises, and many others have written extensively about the function of money. At its core, money enables indirect exchange as a medium to facilitate transactions. In small communities, social credit systems can adequately regulate resources through direct exchange. However, as these communities grow, indirect exchange through money becomes essential. Expanding the division of labor and specialization requires more complex economic calculations. The increasing sophistication of wants necessitates indirect transactions between distant parties. Most crucially, direct exchange relies on trust and familiarity between counterparties, which erodes with scale. Money arose to enable growing communities to reap the benefits of economic expansion through indirect exchange. Without sound money, rising productivity and specialization cannot be effectively coordinated. The Austrian tradition recognizes how critical the monetary framework is in an evolving economy.

Naturally, certain commodities are selected as monies within the market economy due to their optimal monetary properties as a monetary technology. Said differently, The most salable good, which has the lowest rate of declining marginal utility will be chosen to facilitate indirect trade. The primary monetary properties of scarcity, durability, portability, divisibility, fungibility, and verifiability give way to the salability of goods across time and space. Sea shells, beads, silver, and gold are all examples of different commodities that have historically been used as different mediums of exchange for their respective strengths in these monetary properties.

Lyn Alden, in her recent book, Broken Money: Why Our Financial System is Failing Us and How We Can Make it Better reexamines the question of what money is through her ledger theory of money. She writes:

Through this lens, we can come to a better understanding of What Has Government Done to Our Money? The cumbersome nature of physical gold as a medium of exchange ultimately led to the adoption of paper currency, and eventually fiat money no longer backed by commodities. Storing, transporting, and verifying pure gold for transactions became increasingly impractical as economies grew and developed technologically. Gold's weight and risk of theft made storage expensive. Assaying gold to verify purity was difficult for everyday commerce. And transporting adequate gold for large transactions was hazardous. Paper currency provided a lighter, more portable proxy for gold that was more practical for exchange. However, it still depended on central authorities securing adequate gold reserves to maintain convertibility. This constrained monetary policy, as the expansion of currency was limited by gold supplies. Over time, the constraints of gold convertibility frustrated governments and central banks. Suspending convertibility in 1971 allowed greater control over money supply and interest rates, providing more policy flexibility. But without commodity backing, fiat currency carries greater risks of inflation, hyperinflation, and other negative externalities. Alden continues:

In the context of Alden’s ledger theory, the supply of gold is controlled by nature and natural laws. Fiat, in contrast, is controlled by human administration and unequivocally by the State. This explanation is the simple answer to what the government has done to our money. The State has taken control of the monetary ledger away from natural law and used that power to facilitate its metastatic growth. Moreover, it has exerted this control as one of its exclusive monopoly privileges. As advocates for free markets, individual property rights, and the right to self-determination nothing is more imperative in our time than separating money from State. The great Friedrich A. Hayek, who advocated for the Denationalisation of Money, famously stated:

For the past 15 years, Bitcoin has emerged and continued to develop into a possible sly roundabout way that Hayek hypothesized. Initially and abstractly, Bitcoin was conceived of as a Peer-to-Peer Electronic Cash System. A decentralized ledger system utilizing cryptographic digital signatures to enforce the concept of perfect digital scarcity. Bitcoin, as a monetary unit, represents a digitally native bearer commodity asset, a truly revolutionary concept. In the context of Alden’s ledger theory of money, she writes:

Today Bitcoin’s usage is primarily that of a store of value asset. One possible explanation for this is Gresham's Law, which states that when two forms of currency have equal face value, the one perceived as less valuable will circulate more widely while the more valuable one will be hoarded. This helps explain Bitcoin's current role – its capped supply and volatile valuation make it "good money" for holding as an asset, while fiat currencies with less perceived worth remain the common medium of exchange. However, Bitcoin's monetary status could evolve if adoption increases.

CONCLUSION:

Studying monetary history reveals that the evolution of money reflects advancements in technology. Societies have selected different monetary mediums based on the strength of their monetary properties – their salability across both time and space. Examining who controls the ledger for each monetary system also provides useful insight. Natural laws governed the ledger of commodities like gold. However, the advent of telecommunications enabled financial transactions to occur much faster than settling payments in physical gold. This highlighted the limitations of using physical gold as money in the modern digital era. As a result, societies adopted credit-based paper and digital monies with ledgers controlled by human administration rather than natural laws.

Unfortunately, over time, the State captured control of these ledgers, expanding its authority by manipulating fiat currencies, removing their tether from gold entirely.

To counter the unchecked growth of state power, we must return to sound money anchored to a reliable store of value, with a ledger that cannot be manipulated by the State.

Using physical gold as a medium of exchange is no longer practical in an increasingly digital world. Therefore, an inventive, censorship-resistant monetary alternative must be developed to separate control of money from the State. Over the past 15 years, Bitcoin's globally distributed public ledger has proven a fascinating experiment in decentralized digital money.

Unlike traditional currencies, Bitcoin's ledger is not controlled by any single entity. Rather, it relies on a network of individuals voluntarily running Bitcoin software to reach a consensus on the protocol. This decentralized approach allows the market to decide on the properties of the network and monetary units. Ultimately, the market will determine if Bitcoin is best suited as a medium of exchange for humanity in the digital world.

One question we should ask ourselves is this: