When discussing the various competing monies in the global marketplace, a sentiment often arises that only one can win, and everything else will lose. The implication is often that money is a natural monopoly, meaning the market, left to its own, will only choose one money to conduct all trade.
Sometimes commentators state this explicitly. Claims like “Bitcoin will replace all fiat money”, “Ethereum will make Bitcoin obsolete”, or “XRP will become The Standard” reflect this winner take all conception of the market for money. Some of this is just sh*t talking on behalf of a poster’s particular monetary tribe, but some of it is stated and argued for with serious conviction.
But is this true? Is there only room for one? Let’s take a very brief look at some of the historical evidence we have at our disposal. Keep in mind, this post is incomplete with only a few examples, as several volumes could be and have been written about the history of money. This post isn’t meant to be an academic paper nor a novel historical finding. Rather, it should be used by our users to add some historical context to evaluate the “winner takes everything” conception of money.
Native Americans are reported to have used shells, furs, blades, and even teeth as mediums of exchange for centuries. Ancient Europeans are known to have used shells, cattle, weapons, gold and silver. The earliest Chinese civilizations were known to use tortoise shells, gold, knives, and other collectibles to conduct trade. The Romans used gold, silver, and bronze. The Mesopotamians used one of the first credit based money systems as well as barley to handle business and taxation.
We see all over the ancient world, throughout long expanses of time, a few different systems and a few different objects being used in trade and measurement. Even amongst the same monetary media, like metal coinage used in the Ancient Mediterranean, there were often different coins circulating with different levels of purity, different engravings of ensignia denoting its qualities, and differing perceptions of their quality or lack thereof. Looking over the historical record, ancient societies often had more than one type of money that was used for trade and record keeping, and sometimes there was even competition amongst different variations of the same asset.
It is true that there are many examples of a strong state forming a monopoly around a particular type of value exchange, but this would be an enforced monopoly not an emergent phenomena implied by the phrase “natural monopoly”. These state enforced monopolies might be the exceptions that “prove the rule”. And given the propensity of human beings to disobey, and the lack of a surveillance state in ancient times, I’d venture to guess some pretty savvy ancient cypher punks used some alternatives under these regimes of enforced monopoly. There is always and will always be an economic underground.
Maybe the ancients were backwards and we developed out of a state of monetary paganism that lacked one definitive winner. So let’s keep moving forward in time.
During the Tang dynasty in China we witnessed the development of many local paper monies whose genesis began with merchants issuing receipts of deposit. This was surely an innovative development and widely used, but the paper money didn’t replace the metal coinage that preceded it. The paper was redeemable for a variety of gold, silver, and copper coinage. The paper monies and metal monies could be thought of as separate and intimately interlinked at the same time. Each complemented the other, and there were multiple paper monies backed by multiple metals.
Europe eventually adopted the paper monies cultivated by the Chinese. However, these paper bills of exchange used in pre-modern European commerce never enjoyed a monopoly. Many bills circulated simultaneously. Bills of exchange produced and administered in the large metropolitan cities of Amsterdam, London, Paris, and the House of Hapsburg were all prevalent in bank reserves throughout Europe. No one bill of exchange dominated trade or bank reserves completely. There was always a mix. These too were often backed by a mix of gold, silver, and sometimes other assets.
The Ottomans had an official silver coin they used as their chief monetary metal for centuries, but during that time gold and even copper were used to complement the official silver coinage sanctioned by the state.
There are numerous other empires, civilizations, states, and city states we could mention but the same pattern seems to emerge: The use of multiple metals, primarily gold and silver, as well as credit based systems that overlapped and ran in parallel.
The Modern era saw the first true globalization the world had ever seen, so maybe we could see a one world currency form a monopoly. East, West, North, and South had been loosely connected for centuries via trade routes, but had never been tightly intertwined to the extent seen during the aggressive European expansion in the modern era.
The merchant led bill of exchange system that was financing commerce throughout the European continent for centuries was eventually supplemented, and then replaced, by gold and silver bullion backed Central Banking primarily done by the English, French, and Germans.
It is true that these powers and others converged on the famous Gold Standard but this wasn’t a pure market based decision. The Gold Standard, was an agreement between a few of the 19th century’s most powerful nations that others had really no choice but to follow. Many attempts were made by other powers to make the standard a bi-metallic standard but Western European powers lacked enough silver to make that move compelling. These European governments would have ceded a lot of power to other economic and political actors if they included another widely used viable alternative to gold.
Eventually these powers took themselves off the standard that they themselves created when it no longer worked in their favor. The Gold Standard, not gold the element, but the standard itself could be thought of as a fiat money standard because it was created by a formal decree from recognized authorities. Gold, the element, arose as one of a few market based solutions early in man’s history. The Gold Standard was a solution concocted by self-serving European powers and then abandoned when it no longer served their interests. Gold, the element, has never been abandoned as a solution to value storage and trade.
During the time of the Gold Standard, started by the British and agreed to by other powers, the Pound, Franc, and Marc were the dominant media for global exchange and the primary constituents of global foreign reserves during much of the mid to late modern period. The Pound, although the clear leader for a number of reasons, did not enjoy a monopoly on use in global trade or reserves. The Franc and the Mark were a formidable part of this global financial order led by the Pound.
Not only was the Pound’s position as the dominant global reserve currency not a monopoly, its position was somewhat fragile in retrospect. The US Dollar wasn’t relevant to global trade and finance until World War I, but quickly became co-equals with the Pound in the late 1920s, easily surpassing the Franc and the Mark. Post World War II, every built up advantage and relationship the British Empire enjoyed helped slow its demise, but these advantages were ultimately unable to hold off the ascendency of the Dollar as the dominant reserve currency. The Dollar was increasingly useful, America’s economic and military might were incontrovertible, and the switching costs for global financial participants were quite low.
Although the Dollar was the clear monetary juggernaut of the mid to late 20th century, other currencies were still a major part of international trade and global foreign reserves during this time. This post World War II order, although clearly dominated by the Dollar, was still not a monopoly. The Dollar has been able to maintain its dominant position because of a lack of alternatives ready to meet the challenges of being the dominant reserve asset. It did not hold its position because simply being a reserve currency is a “natural monopoly”.
The Pound, the Franc and more recently the Yen and the Euro have played large roles in international commerce and foreign reserve balances throught the late 20th Century even though they might have lacked the ability to be the dominant anchor of global trade and finance. Now with the rise of China as a global power, the Yuan could be included in that mix in a big way in the not too distant future.
The beginning of the end of modern money officially began with the invention of Bitcoin. We can draw a few inferences from the history of money described above and try to apply it to the vast sea of cryptocurrencies Bitcoin inspired.
If the past is prologue, it’s unlikely that more than a large handful of existing protocols will be used in any significant way as “money” in a traditional sense. Most of the thousands of cryptocurrencies alive today don’t have much of a shot at ever becoming globally relevant monies. Some may have some other use that hasn’t existed before, but it’s hard to argue many more than a few will have significant roles as money.
It’s also highly unlikely that only one cryptocurrency will prevail and all others will die and have no use. This really has no historical precedence either. Looking at the short but turbulent history of cryptocurrencies this, “all but one will die” conception of money, doesn’t seem to be the case either. Many have called for an end of everything not named Bitcoin, but the likelihood of that seems to diminish every year as yet another protocol is created and capital finds its way to alternatives to Bitcoin, not just Bitcoin itself.
We can also see from the history of money that a monetary order can hold up for a while, but it is hardly ever locked in stone, ending monetary history once and for all. One form of money or monetary system could be dominant for a period of time, but there is no natural law that says this has to be the case forever into the future. As long as there are viable alternatives and switching costs are low, having the lead position can be very fragile.
As of now Bitcoin (BTC) is the reserve asset of crypto-land. It’s up for debate whether or not there are viable crypto based alternatives to BTC that can act as reserve assets for crypto-land. But what is not up for debate is that switching costs between alternatives are extremely low. Moving from one digital asset to another can be done easily and cheaply in something like the Edge Wallet. Network effects are real, strong, and shouldn’t be flippantly dismissed, but with switching costs close to zero, those effects can wither away quite swiftly if the global market wants to go in a different direction.
This should give monetary tribalists hope and despair. Your asset has a chance to become top dog, but that position is never really safe in the face of viable alternatives mixed with practically non-existent costs to switching. For users and investors, this same fact should bring a smile to your face, because these protocols will have to compete with each other to stay relevant. Open market monies will have to compete for your trust and use or they’ll be relegated to the dustbins of open source history.
After examining monetary history and our own history in cryptocurrency, its hard to conclude that money is a natural monopoly. It is true that there doesn’t seem to be room for a wide diversity of systems or standards but the conviction that only one will win and lock in its place as the winner is misguided given the existence of viable alternatives and low switching costs.
If history is our guide the global market for money will converge on a handful of options with one being the dominant choice….for a time. Whatever this choice is, there is nothing that guarantees it will stay the top choice. It will have to earn that top spot everyday in the market.