How do you make change? If you have a dollar in your pocket, and you want to pay someone a quarter, do you cut the dollar up into four equal parts and give one of them to the other person? No. Because when you cut a dollar up, it loses its value, and the resultant pieces cannot be traded. But it wasn’t always this way.
Did you know that it was once possible to cut a silver dollar into four equal parts and each one was worth a quarter? This was because the value of the dollar derived from the value of the silver, and not from the prestige of the bank that had minted it. Pirates of the Gulf Coast and frontier settlers alike used to do this, and the currency they used was called “bits and pieces.”
Today, using government created currency has the following disadvantages:
- It is subject to inflation because it not indexed to any commodity, and the government can decide to print as much as it likes.
- It is subject to taxation, because the exchange of currency is not anonymous, and it leaves a verifiable trail.
- It is not truly fluid because it cannot be melted down and cut into indefinitely smaller pieces.
Okay, I’ll admit the third disadvantage has never really bothered me that much, since inflation has rendered even the cent too small to bother with, but wouldn’t it be nice not to have to worry about making change? Wouldn’t it be nice to break a twenty just by cutting it into pieces?
Today, in the virtual world, there is a new version of the old bits and pieces used by pirates and pioneers. It is called BitCoins. Here is a video that explains a little about it:
The mining metaphor employed by the BitCoin software is meant to solve the problem of predictable scarcity. When silver and gold were the common currency, they derived their value from the fact that these metals were rare, had to be mined, could not be produced any other way (alchemy), and were held to be of value by most people. The mining mechanism in the BitCoin software simulates rarity and the requirement of effort in order to acquire Bitcoins. The area in which this concept seems a little less effective than precious metals is this: BitCoins serve no useful purpose except as currency.
Here is a video explaining BitCoin mining:
People use dedicated computers in order to mine BitCoins and then they sell them on an open exchange. Not everybody who uses BitCoins is a miner. Most people just buy them on the open market.
People use BitCoins to purchase things they would not normally buy using regular currency for fear of being traced by the authorities. Here is video about that:
If you would like to get in on the BitCoin action, here is a link to their site.
For some biographical information about the founders and participants in the BitCoin movement, watch this video from ReasonTV:
Are BitCoins the wave of the future? I’m not sure. Concerns about BitCoins include their vulnerability to hacking and the fact that government scrutiny of computer records can make serious inroads to the anonymity that they are meant to offer. The price of BitCoins has been volatile of late, and some early adopters are rethinking their strategy. But whether BitCoins succeed or fail, it seems clear that a decentralized currency would be a good thing to have.
© 2011 Aya Katz