Where are these currencies from?
They are from the United States of America and there were thousands of these. Different states, counties, towns, and private banks would all have their own currencies:
Where did I get them from?
I bought these replica from a museum. I spent most of the day looking at dinosaur bones and on my way out I bought these at the gift shop. All of these currencies are extinct now just like the dinosaurs.
Did an asteroid kill the currencies?
No
These banks went bankrupt over and over. Banks were born, then died, then more were born and then they died.
How did this problem get "fixed"?
Central Banks
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I want to start by saying that I am a proponent of blockchain technology and cryptocurrencies. If we want cryptocurrencies to succeed we should learn everything that we can about why decentralized currencies fail. We can also learn from the weaknesses of central banks. This will allow us to "build back better". You can't just "repeal" the central bank without a "replacement".
What problems did the United States Central Bank (The Fed) solve?
Solvency: They are there to help member banks in a crunch and it reduces bankruptcy
Inflation: They can contract the supply to control inflation. This is the first part of the "dual mandate" of The Fed.
Liquidity: They can expand the money supply in situations when the economy needs stimulus or the job market needs a boost during high unemployment. This is the second part of the "dual mandate" of The Fed.
What does this mean for crypto?
Some blockchain ecosystems do a good job of solving the above problems and some do not. The ones that don't will become extinct and be memorialized in digital museums as NFTs, (Nonfungible Tokens).
Decentralized money is not new and in fact the history of money usually starts as decentralization and moves towards centralization. People usually prefer decentralization because it easier to start that way. The example that I gave above is from the United States from hundreds of years ago, so let me give you a modern example.
Modern History of Decentralized Banking -- The EU and the EURO
Each EU member already had their own central bank and then they came together and built another centralizing layer on top of that. It's like they have feds within a fed like a dream within a dream.
Why did they do this?
This is economies of scale applied to money. There is an efficiency advantage to centralization. It reduces transaction cost between different countries. If I am a French business trading in 8 different countries / currencies in Europe then I expose myself to conversion cost for converting currencies and I expose myself to currency risk in all of those 8 countries. I have pay money every time I convert back to Francs (FF) and I am exposed to different inflations or currency fluctuations in each country.
As a business I might also be buying raw materials from these different countries and I need to easily compare raw materials across countries and making the conversion can introduce errors into your accounting processes or can just be mentally taxing having to think in different units all the time.
We already see the above happening with Cryptos. Too many different wallets, too many exchanges, too many transfer fees, and too many conversion fees. This is why some consolidation can lead to efficiency gains.
The centralized EU trade laws along with the Euro currency reduced transaction cost and trade barriers. This added layer of centralizing is not without problems. Some believe that the Greek Debt Crisis highlighted some of the weaknesses and strengths of the centralized currency. I won't go into more detail about the European Banking System, but I think I hit some of the highlights.
The key in the new crypto economy will be to learn from both the strengths and weaknesses of these centralized currencies so that we don't make the same mistakes. The questions we should be asking is in which cases would centralizing and consolidation be better for the users and the broader ecosystem and in which cases would a proliferation of more competition and choice be better for the ecosystem.
I look forward to hearing your thoughts. Please leave comments or questions below.
