Shermin Voshmgir, May 5 2023.
This is an excerpt from the recently released third edition of Token Economy: Money, NFTs & DEFI.
While it has become widely accepted that goverments regulate our currencies and the money supply within a geographical territory, this was not always the case. The state monopoly over money is a product of historic developments, combined with practical necessities, and the social consensus around what constitutes money. In fact, economic scholars differ on their views on the topic, but those who don’t accept the monopoly of the state to issue and govern over our money are usually considered as “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. Interestingly, mainstream economists describe economic theories that do not adhere to neoclassical economic theory with this rather “religious” term. From a mainstream economics point of view, heterodox economics refers to basically every school of economics that is not in line with neoclassical theory — such as Austrian economics, Political economy, Feminist economics, Ecological economics, Behavioral economics, Keynesian economics, or Marxian economics — many of which 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 many other so-called “Austrian economists.” Hayek promoted a special form of free-banking system of competing private currencies, without the need for a central bank that holds a monopoly over issuance of money. He suggested that private financial institutions take over the functions of central banks, such as the important function of acting as “lender of last resort,” but he didn’t 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. Ideas around the separation of state and money were also omnipresent in the communities working on financial cryptography that led to the emergence of Bitcoin. In the context of cryptocurrencies, the term was probably mentioned for the first time in 2015 by Erik Voorhees, the founder of one of the earliest token exchanges Shapeshift. Erik made an analogy between the freedom to choose one’s money and the freedom to choose one’s religion and stated that money and financial freedom are fundamental aspects of our lives and the type of monetary system we live in affects how one’s life unfolds and is therefore just as — if not more — important than freedom of religion. Vorhees argued that the choices that 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.”Erik Voorhees
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. This means that there is no legal provision on 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 practice that evolved over centuries and adapted to geo-political and global economic developments. In most 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 on a constitutional level.
The narrative around what constitutes money has been predominantly driven by those who have been in power over local and global financial systems, and actively or passively wanted to protect their own best interests.
As money becomes an increasingly native feature of the Internet — with a publicly verifiable and globally accessible infrastructure such as blockchain networks— it will be interesting to see how this will impact not only our monetary systems, but also our financial systems and the real economy. Can so-called cryptocurrencies and other tokenized assets replace money as we know it? This question usually leads to highly controversial debates and the answer depends on one’s definition of what constitutes money. Even economists and economic anthropologists differ in their views on the history, purpose and nature of money. The lack of financial literacy in the general population also means that most people have not understood or even thought about these questions.
The intention of the new edition of the Token Economy Series is to go deeper into the core aspects on money &credit. The recently released book on Money, NFTs & DEFI gives an overview of the concept of money and credit, including the history, types and functions of money, before deep diving into the aspects of tokeninzing various forms of assets and trading these assets over a collectively maintained decentralized financial infrastructure.
Read more in the book Money, NFTs & DeFi.
REFERENCES
This link leads to a website that contains all the references to the source materials used for the research of the chapters, and should also provide a useful reading list for those who are interested in a deeper dive into the topics presented in this chapter.