Burt’s Bucks

If you missed last Friday night’s episode of Raising Hope, you didn’t get to see the trials and tribulations of a fledgling monetary system.

Called “Burt’s Bucks“, S04E02 started out with a revelation:  Burt finds out that he can get paid in other things than money — lobsters for instance!   This gets the Chance’s minds turning: who else would take barter, and how can they make it work for everyone?

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Bitcoin Suitcase ATM

You’ve probably heard of Bitcoins before, but even with a close understanding of how encryption works and the idea of wallet chains that tracks, but yet doesn’t track, the Bitcoin, it’s all a ‘bit’ confusing.  Because a Bitcoin is little more than, well, bits on the internet, there’s nothing physical to hold in your hand, jingle in your pocket, or get in a birthday card from Grandma.  Well, maybe in an eCard, but that’s a pretty sophisticated Grandma if she’s sending you fifty bitcoins in an eCard for your birthday.

Old-school Grandma can now send you bitcoins in the real-world now, too:  a handful of hackers have developed a bitcoin change machine, built into a suitcase. They brought it with to DefCon as a fun toy, but they ended up sparking quite a bit of interest.

The BitCoin Briefcase lets you insert regular coins, and then prints out the proper value in BitCoins as a QR Code. It sorta sounds like the reverse of the laundromat coin changer, but there’s something even more similar out there.  You know those Coinstar coin counting machines, sitting over by the distilled water dispenser and Stanley Steemer display at the grocery store?   Nearly every one can dispense giftcards, and some can even convert pocketchange to PayPal balances.

So, BitCoin might not seem all that innovative, especially when you compare the fact that, with ECH and online bill pay, most people never see a dollar sign on paper ever.   But, let’s go back to a BitCoin’s existence.

A BitCoin is a small sequence of characters, which represent a certain value of BitCoins, which exists and is verified to have value by the BitCoin mining process.  The mining process is essentially a mathematical process, and not one based in regulation or law.   As such, once a BitCoin exists it is about as individual an object as a metal coin.  Your dollars may get sent to PayPal, but they exist in PayPal only as long as PayPal chooses to acknowledge they’re there and allow you to have access to it.  Stealing, devaluing, or counterfeiting a BitCoin is inherently difficult, if not impossible.

So, let’s go back to the BitCoin Briefcase:  they’re doing something one better than CoinStar.   A CoinStar funds a debit account with a business, and the status of your balance is at the whim of the business’ discretion, the agreement you made in funding your account, and any applicable laws.   A BitCoin, however, is permanent, immutable.  Its value might change, but so does gold; an ounce of gold is still an ounce of gold.  So, a BitCoin is still a BitCoin whether stored on a computer or printed out as a QR code, but a “dollar” on an Amazon giftcard is a bit fuzzier.  The BitCoin Briefcase might be a fun toy, but it’s a demonstration of something that a dollar isn’t.   Even if you convert a BitCoin from one form to another, in theory, it does retain its inherent value as a BitCoin.


Amazon Coin

Amazon has officiallly launched its own micropayment currency, called Amazon Coin.  Currently, one ‘coin’ is worth a penny, which makes it somewhat simple for calculating the exchange rate. It is designed for buying digital content for the Kindle, from books to apps, and customers buy or earn Amazon Coin in order to load their account.

With a name like “Amazon Coin”, there’s sure to be comparison to the BitCoin phenomenon, but they’re nothing alike.   Getting an Amazon Coin will be akin to sticking a $10 into the arcade token machine and getting forty brass tokens to stick into the pinball machine.  A Coin is worth one hundredth of a dollar; when the dollar fluctuates, so will the Amazon Coin.  Calling it a ‘coin’ is a bit of a misnomer; in the business world, internet currencies are “tokens” or “coupons”; only governments make coins.  But, whatever symantics Amazon thinks having online coins will avoid scrutiny from governmental entities is their own problem.

So why even call a “Coin” something different?  Why not just call them Amazon Gift Cards – which are already a thing, a way to get your money into Amazon in bulk to use for smaller transactions.  One thing about it being a “Coin” is that it becomes a purchase transaction, rather than a gift card which is increasingly regulated as persistent storage for money.  I’ll bet that there will come a day when app developers and participation in the Mechanical Turk will have the option of being paid in Amazon Coins.  This makes Amazon a barter-world: you do work that earns Amazon real money, and in payment you get tokens to spend at the Amazon store.  Sounds a bit like company scrip, don’t it?  Scrip isn’t horrible, as long as it isn’t misused.  Amazon isn’t dumb enough to require all transactions to be made with the same virtual money system, but if they did they wouldn’t be the first to try and restrict payment options.

Buying Amazon Coins diverges from the gift card model when you try and buy them: the more Amazon Coin you buy, the deeper the discount you get.  Spend $90, get 10,000 tokens (equivalent of $100).  Let’s see a gift card do that – even though there’s no real reason a gift card couldn’t have bonus dollars loaded during the transaction.  You can buy a gift card and then sell it to somebody; there’s a transferability in it.  Amazon Coins, not so much: according to the terms of use, you can’t transfer them or redeem them for cash.  You’re stuck buying products from Amazon – but you can bet that somebody will figure out how to capitailze on the 10% bonus and come out ahead.  But, since this is a retail transaction, Amazon can decide to stop selling coins to somebody if they don’t want to.   All this puts more control in Amazon’s hands, which doesn’t always sit well with people — which is why eBay relaxed their PayPal requirements for sellers.

The other benefit for Amazon, aside from giving free Coins when buying the tokens, they can just hand them out willy-nilly without using coupon codes or other odd redemption processes.  If you own a Kindle Fire, you’re getting $5 in Amazon Coin just for free, to encourage the use of the system.  Go ahead and spend them, but be careful when converting your dollars into Amazon Coin: be aware of what you’re getting for your money, like any other product you might buy.

The Penny Has No Value

Well…not really, but titles are supposed to be attention-getting, right?  Canada is discontinuing their penny because it’s more of a pain to keep them in circulation than to continue minting them.  The nickel, then, becomes the smallest unit of currency.   This shouldn’t blow your mind, but a lot of people are confused that the basic unit of money will be gone altogether, and although the dollar is one hundred pennies, you’ll can’t actually count out a dollar in pennies anymore.  People forget that it wasn’t too long ago that pennies were more valuable, and fractional currency had more options.

If you’re an old fart like me, you remember when gas prices were 0.99 and 9/10ths, so the gas signs said something like 0.999.   When I was a kid it seemed like teasing: just make it a round number, already, who actually has a tenth of a cent?   Well, Missouri did.  A Mill is one tenth of a penny, and mill tokens were quite common through most of the 20th century to give a quantity smaller than a penny for percentage calculations on taxes and other incremental amounts.   The average person on the street got things rounded to the nearest penny by the retailer, but when the retailer paid the state, they could use these tokens to get an exact amount and save a little bit of money in the process.

Missouri made so many of these that you can still buy them on eBay by the bagful.  This gives some perspective about the concern that pennies cost more to mint than their metal is worth, which is one of Canada’s main excuses.   There was a time when precious metals were used to make a coin worth its weight in gold, so to speak, but even back in the 19th century low-value coins have always been made out of something different than their value.   The whole “silver plug” thing was a poor attempt at adhering to a currency of precious metals, because even back then precious metals were…well…precious, and worth money, it was difficult to get a few cents’ worth in a coin.  So, there was paper fractional currency, there were postage stamps used as money, they made pennies out of bronze and steel, and Missouri made their tax tokens out of cardboard and plastic and zinc.  The problem with the penny isn’t that they cost more to make than use; the U.S. Mint has no problem making coins out of cheaper materials to save money.  What’s stopping the mint from making a bunch of tiny pennies out of zinc for a tenth of the cost of the current penny and putting those into circulation?

Aside from the legal hula-hooping to change the existing laws about the coin’s content and appearance, nothing at all.  The problem is that, regardless of what the coin is made out of, the current penny of today is worth about a mill in 1950 dollars, depending on your calculator.   Who wants to deal with such small increments, other than beancounters and tax collectors?  Other than to buy unspeakable power, there’s not a lot of use for coins that have a fractional value.  Uncontrolled inflation causes all sorts of devalued small-currency coins around the world, and compared to other nations, a change in value to 1/10th its original value over a half-century isn’t too bad.

We live in a world today where, economically, the difference between $3.74 a gallon and $3.75 a gallon is  the same as that 9/10 on the old gas signs when gas was 50¢ a gallon.   Is that tiny amount worth the counting, the banks shipping bagfuls from building to building, the national banks weighing and replacing and distributing, the untold jarfuls in dresser drawers? The problem is that a mill isn’t worth the time to stop and pick it up off the street these days. It’s not going to eliminate penny transactions where it counts, like electronic transactions and in calculating those final totals, just like when the mill was an impactful portion of sales tax calculations in Missouri, but for the rest of us this is about simplicity and convenience.   The penny is expensive, but not purely in minting and seigniorage — it’s about the length of time to transact the exchange, wasting time over amounts that are soo small as to be insignificant.   Let the penny go; it’s not worth what it used to be.

What’s a Currency War?

The Financial Fear for 2013 is going to be this “currency war”.  The G7 recently issued concerns over an escalating battle of devaluation of national currencies to artificially encourage international trade.   What happens is a central bank reduces the value of their currency against gold, or the U.S. dollar, or whatever their standard — for example, Japan goes from 50 Yen to the dollar to 60 Yen.  Now, a dollar buys more Yen, which should in theory encourage trade and investment in Japan because the “standard” buys more Yen in the transaction, or Yen worth of stuff.   This manipulation also causes a bit of inflation, reducing the impact of interest rates on lending, although it does weaken savings and inventory values.   Now, somebody else — Greece, Norway, England — says, “hey, they devaluated their currency so trade moved away from us; I’m going to devalue our currency, too, in hopes of evening the playing field!”  This goes round-robin until, say, the markets realize that the U.S. dollar is suddenly way overvalued based on its buying power, and then the dollar gets corrected as well.    In effect, this is a passive-agressive trade war where, rather than penalizing with direct tariffs or other costs, the aggressor weakens their own currency to cause greater expenses for their foes.  Digging a new channel to divert a river rather than building a dam, so to speak.

Devaluation helps borrowers and is a built-in “fire sale” for sellers, but it impacts lenders and buyers — investors, that is.  To make sure it doesn’t hurt too bad, the G7 intends to force exchange rates that favor all, which should avoid a cascade of competing devaluations.  Kudlow doesn’t think a currency war is even going to happen, interpreting it as normal financial adjustments to keep weak economies afloat — the same result, but not caused by central banks competing for international exchanges.  Even if there is an element of international competition, The Big Picture sees the transactions as auto-correcting, while Drezner sees the resurgence as political shifting to keep control in certain areas.   Whenever the term “currency wars” pops up, it seems to encourage the “Gold Will Solve Everything” people (no, it won’t), partly because the guy who really brought the term Currency Wars to the public is a gold standard proponent.

Will Pay To The Bearer On Demand

Just before I was born, most money had a “Will Pay To The Bearer On Demand” line next to the value.   That seemed silly:  I already have $20 right here, in my hand, how am I going to get paid $20, and by who?

You see, before the Civil War, all money was gold, silver, copper, etc: precious metal, with its value set by its weight.  The Civil War, however, caused significant economic trouble, and the U.S. needed to pay its public debts. So, they resolved to issue paper money, whose value was printed on its front, but not backed by any precious metals.   This didn’t go over so well, because people worried that, if they got these United States Notes, people wouldn’t accept them and they would lose their value.

So, along came Gold and Silver Certificates.   These were paper money specifically backed by precious metals held by the Treasury; for every certificate dollar issued, there had to be that much gold or silver in the vaults to back it.

Economies are too flexible to adhere to a physical amount of gold or silver sitting in a vault, though.  Interest on loans, stock market wealth, controlled inflation, foreign currency fluctuation, and invention all bring a need for dollars without the corresponding increase in precious metals.  So, the Federal Reserve appeared as a solution:  they could create dollars of their own, but they had to be backed by investment in the economy.   This hedged against loss of value, but disconnected money from precious metals.

So, these Federal Reserve Notes had the message “Will Pay To The Bearer On Demand” printed on them, to let people know that their Federal Reserve Notes were backed by something: the U.S. Dollar.   And, if that wasn’t enough, there were still other types of money around — gold certificates, silver certificates, and U.S. Notes.  So, if you were worried about your Federal Reserve Note’s value, you could go down and get your money exchanged for silver dollars, for example.

In 1933, the price of gold exceeded the value of the dollar, so the gold standard was dropped and the silver standard adopted.  In 1963, however, silver was now worth more than a dollar as well, so the U.S. economy was stuck.  The economic value of the dollar remained strong, but they couldn’t keep backing it by silver.  So, the rules were changed: any silver certificates were to be cashed in, and all paper money afterwards would be legal tender, not redeemable for anything but other dollars.

So, starting with Series 1963 (aside from some miscellaneous silver certificates issued later to finally deplete the silver reserves), the notice “Will Pay To The Bearer On Demand” was removed from U.S. paper money, not because of some Illuminati conspiracy, but because it became the only money in the United States.

Lydia, the Tattooed Money

Photo: Levi Brown; Prop Stylist: Ariana SalvatoEverything you ever wanted to know about the why of money can be found here, in “A Brief History of Money”, from the ieee Spectrum.  It is, of course, a very nutshell overview, because if it were simple in any way then we’d all be rich.   The biggest takeaway is the different way that the value of paper money is explained, which gives a bit better perspective on why having the Federal Reserve isn’t such a bad thing, provided inflation is controlled and money supplies remain liquid.  One thing I didn’t know:  electrum coins from Lydia are the first modern monetary system in history.  That is, if we can trust Herodotus, but I thought money would have been much older.