In the year 20232071

Okay everyone, open your SophOS to our module on currencies. External network access is going off now, so finish up any chats please! Before we start with the new material for today’s lesson, let’s refresh a bit. You all use it every day, but could someone remind the class of the technical definition of GromaCoin we learned last week?

And why are so many people willing to sell valuable goods and services that they can actually use, like sandwiches or hyper-simulacra, for GromaCoin, which are, in a literal sense, just some 1s and 0s on a server somewhere?

Yes, that’s right. Money tends to be most effective when it doesn’t vary wildly in terms of either supply or demand, and one way to achieve this is to tie money to something that has provable value and is thoroughly incorporated into the functioning of the economy. We call this “coupled currency”, because it’s correlated, or “coupled”, in both quantity and value to the commercial activity for which it’s used. This makes intuitive sense to most of us today, but it’s actually been a topic of much debate in the past and for many centuries was not how things worked.

For example, let’s imagine you run a sandwich shop, and I walk in and offer to pay you with a currency that’s based on nothing tangible, except that everyone currently agrees it’s worth something. How comfortable would you be giving me a sandwich for that?

It’s something we take for granted today, but for these early societies, the concept of money represented a genuine technological advancement — a process improvement that changed people’s lives for the better. The fact that currency was invented independently all over the ancient world by many different civilizations showcases the near-universal value of some form of currency exchange. Each currency took a different form but served a similar purpose.

Many of these societies learned over time that it’s quite difficult for a currency with more symbolic than practical value to stand on its own. Yes, gold and silver had some practical uses, such as for jewelry and other forms of art, but it would be difficult for the average market participant, who had little use for these substances in their daily life, to come up with a valuation that would be shared by enough other market participants to be useful as a currency. Instead, rulers would decree that one unit of their currency was worth a specific amount of a staple commodity and let the markets figure out the rest from there. This was the system in ancient Babylon, in which each of the silver coins known as shekels was worth 160 grains of barley. In essence, this currency was backed less by silver than by wheat, which was a core input to the agrarian economy of the time.

This kind of central coordination was useful, and potentially even necessary, in ancient environments that lacked the information distribution technologies, like the Internet or the printing press, that we enjoy today. By laying down a unifying standard, states streamlined commercial transactions for their subjects. Since the official value of a coin was generally higher than that of the metals it was made from (a phenomenon known as “seigniorage”), these states also secured an extra income stream for themselves. For instance, a silver coin worth 100 cents might only contain 90 cents worth of silver, so every coin generated would net ten cents for whichever ruler had the rights to mint it (a profit that would be realized when the coins were used by the government to purchase goods and services).

But since states, through their monopoly on the legitimate use of force, were able to prevent other entities from providing competing currencies, they eventually realized that they could manipulate the details of the currencies they controlled to their advantage. Changing the metallic composition of coins to a cheaper mix — say, from 90 cents worth of silver to 60 cents worth of silver and 5 cents worth of zinc — increased the rate of seigniorage, allowing rulers to transfer wealth from their subjects to themselves without attracting the same level of attention that a tax hike or a forcible seizure of assets might.

Since means of determining the composition of coins weren’t widely available in ancient times, rulers had a large degree of latitude in making these changes. But as the sciences advanced, and measurement tools became more common, it became easier to hold rulers to account by demanding pure currencies, with gold and silver being the most common.

While this was an improvement relative to the less-accountable systems it replaced, it ran into challenges of its own. In Europe, for example, the most common commodities used to back currencies were gold and silver. The use of these two metals as stable stores of value was predicated on the relatively predictable supply available to the Old World empires, but the discovery of the New World would upend this relationship. When Spain found tens of thousands of tons of silver in the Andes in the 16th century, it quickly became one of the richest empires in Europe, using its newly minted ‘pieces of eight’ to import goods from all over the world, and, unintentionally, creating significant inflation elsewhere in Europe by flooding the market with newly minted currency.

In the midst of these challenges stemming from the relationship between money and metal, another form of currency was gaining steam in Europe. Promissory notes, or legal documents specifying the terms of a debt to be paid, had long been traded between parties other than those for whom the document was originally written. For more context on how this might have worked, read this short story.

In this way, promissory notes served as a currency of sorts, though they were not standardized or used by broad swathes of the populace outside of money-trading circles. Scaled adaptation would require either a high degree of trust between users or a centralized, accepted authority to enforce the debts.

While this technique evolved independently in many regions, widespread usage occurred first in the 17th century in Europe, when public (i.e. government-run) banks began issuing large volumes of debt as paper money to finance the various projects of their respective states (largely war with each other and colonization elsewhere in the world). For example, if the English government needed to build a new fleet of warships to compete with France and Spain in the New World, it might issue a large amount of silver-backed paper money to pay the shipbuilders. Then the shipbuilders could spend this money on whatever else they needed to run their businesses or buy necessities for themselves.

As everyday people became more comfortable with treating specially marked paper as being equivalent in value to precious metals, the need for these notes to bear interest in order to be accepted declined. So instead of a note being a true debt instrument, i.e. offering the holder a stated value back plus interest over time, the notes evolved into something much more like the paper currency that dominated the 19th and 20th centuries, with a fixed value in nominal terms.

Around the same time, private banks began to adopt a practice known as fractional-reserve banking, in which they transitioned from keeping 100% of their deposits available for withdrawal at any time by their customers to keeping only a much smaller amount of deposits in reserve (10% or so) and loaning the remainder out. This might sound risky (and to some degree it was; if everyone tried to withdraw at once it could cause the bank to become insolvent, i.e. unable to allow depositors to fully withdraw their money — a phenomenon known as a run on the bank), but experience demonstrated that, outside of rare occurrences, depositors tended to keep enough money in their accounts for banks to loan confidently within the constraints of a given reserve ratio. This financial innovation enabled the total value of loans/money banks issued to exceed their total reserves of cash by a significant multiple, thereby stimulating much more economic activity than had been possible previously. This allowed the countries best able to master it — England being the primary example — to take a decisive economic lead over their rivals.

So let’s review. Initially, currencies literally were assets, e.g. coins made of metal. Then, currencies became paper, which was redeemable for assets. Banks went through an analogous evolution. Initially, they held depositors’ assets; if you were a depositor, your deposit was your specific bar of gold or silver. Then, under fractional-reserve banking, your deposit represented a generic claim on assets of a specific value that would be drawn from whatever the bank had on hand at the time, allowing the bank to lend out the majority of its deposits.

Now let’s take a look at states, which went through a similar evolution. Initially, states issued metal currency or paper currency backed by hard assets, i.e. 1:1 backed by grain, silver, or gold. Then they realized they could stretch this ratio and issue much more currency, keeping only a fractional reserve of the backing asset. This new paper currency could be spent by the government and was functionally debt since it could theoretically be redeemed for the underlying asset upon request to the central bank. In this way, states functionally merged the processes of public debt issuance and new currency provision. States weren’t just overseeing the validity of paper currency to facilitate commerce and then taxing commerce to fund their operations; they were issuing wholly new money to fund their operations, which then also expanded the supply of money for taxable economic activity. SophOS can give you a more detailed history on the relationship between metal and money for those interested in bonus reading.

The last gasp of widespread asset-backed money emerged in the aftermath of World War II in the form of the Bretton Woods system. This system was the result of an agreement between the western Allied powers and Japan to set fixed exchange rates between each of their currencies and the US dollar, which would in turn be redeemable for gold at $35/oz with the US government. The goal was to ensure a reliable environment for international commerce, with stable rates of exchange and lowered potential for competitive devaluation. However, a combination of inflation, public debt, and a current account deficit in the US resulted in overvaluation of the dollar relative to other currencies, which led other countries to begin exchanging their dollar reserves for gold.

With gold reserves dwindling, on August 15, 1971, President Nixon ended the dollar’s convertibility with gold. This began a period dominated by pure fiat currency that would last for almost 70 years. Relative to earlier periods, this gave the federal government significantly more latitude to respond to economic downturns by increasing the money supply. A series of economic shocks were accompanied by massive fiscal stimulus and quantitative easing (QE) programs to get the economy growing again.

Each package was effective in driving growth, but also resulted in the functional printing of trillions of new dollars that naturally led to a decrease in the value of each dollar and, more damagingly, a decrease in confidence in the long-term value of the dollar. All of this drove up inflation, bit by bit, until the inflation rate peaked around 20% annually in the mid 2030s. The Meijer administration aimed to solve this problem with the Currency Stabilization Act of 2039, which succeeded in bringing inflation back to the single digits, but the damage to trust in the dollar and its status as the world’s reserve currency couldn’t be repaired so easily. Throughout the preceding three decades, increasing numbers of people had begun to recognize the risks associated with the dollar and to seek out stabler alternatives. Gold and silver were a part of this as always, but new entrants like cryptocurrencies and a variety of different types of decentralized money quickly jumped from experimental status into trillions of dollars of total market value.

Things never got quite that bad in the US in the late 2030s, but people were worried they might. As a result, consumers started shifting towards currencies that they knew by definition would enable them to purchase the same predictable amounts of essential goods and services as when they first acquired them. People would cash most of their paycheck out into Ether, Groma, GigaJoule, Asclepius, gold, stocks, or durable purchases, keeping just what they needed in dollars to make short-term purchases from vendors that didn’t accept these other currencies yet. For more information on how the transition to coupled currency occurred, take a look at the Gromafied Economy.

Since most people elect to receive the majority of their paychecks in realcoins like Groma or Asclepius, which appreciate over time relative to general consumption, the money in their accounts actually increases in terms of real value. People don’t have to put as much effort into picking smart investments in the stock market because the currency itself is an effective investment. Savings rates have increased steadily alongside this trend since people trust that their currency stores will yield compounding returns down the road. And because each of these currencies is forced to compete with all of the realcoins in an open market, the same competition that keeps businesses performant keeps these currencies in relative balance. There is no legal tender mandate for any of them, so the operating boards have to compete with each other for consumer and business trust. This was true to some degree of the Federal Reserve of the US versus the European Central Bank of the Eurozone and the Central Bank of the Republic of China. Technically they competed, and still compete, with each other, but each could rely on hundreds of millions of captive users, which created a somewhat monopolistic monetary ecosystem in each country.

In addition to transforming the ways in which we use and think about money, each of these new currencies had a lasting impact on the actual industries on which they’re based. They all have unique, interesting stories, but for the sake of time, we’re just going to cover Groma today, and your homework assignment will be to read about the others and come up with a new hypothetical realcoin of your own to present to the class tomorrow.

For much of recent history in the developed world, owning one’s home has not only been a symbol of social status and self-sufficiency, it has been a powerful practical tool for building a durable, reliable base of personal wealth. Owning the home in which you live removes the necessity to pay rent monthly to someone else and enables you to benefit from the appreciation of the underlying asset. It was therefore considered a wise step for those who could afford it. Additionally, homeownership was seen as promoting stable families and giving people more of a stake in their neighborhoods and in the physical upkeep of the home itself. But the leap from renting an apartment to making a down payment for a home was a significant barrier for both individuals and the existing banking system in the early 20th century. To this end, starting in the 1930s, the US federal government began heavily incentivizing homeownership by providing mortgage financing, mortgage insurance, and tax incentives for mortgage debt, making mortgages much more affordable; as a result, the portion of households that owned their own home increased from slightly over 40% to roughly two thirds by the turn of the 21st century. This high rate of owner-occupiers was therefore not just an expression of the natural preferences of the households involved, but also a function of major government intervention to support it.

But this approach to housing policy was not without drawbacks. A government-prompted loosening of lending standards in the first decade of the 21st century that aimed to continue increasing homeownership rates was one of the contributing factors behind the financial crisis of 2008. The US economy eventually recovered from that shock, but other drawbacks remained. On a fundamental level, although owners of a discrete home are incentivized to make improvements to the home itself, their incentives with regard to the status of the surrounding neighborhood tended to net out towards keeping the overall housing supply as low as possible. That was mostly good for current homeowners, but bad for everyone else.

To understand this situation better, we should examine the underlying economic principle that guided real estate development for most of the 20th century and the first half of the 21st – that of concentrated costs and diffuse benefits. If one group is heavily invested in the outcome of a particular policy issue — generally because they have a large financial interest in it or live in an area immediately impacted by it — their voting and lobbying efforts will often depend entirely on that issue. Most other people won’t care enough about the issue for it to influence their voting decisions, even if it affects them to some degree. This means that, even if the total benefit of approving new housing to the city (or country) as a whole outweighs the cost to its immediate neighbors, the benefit is spread so thinly that a given person in another neighborhood who wants the development won’t fight nearly as hard as the development’s neighbor who opposes it.

Since this pattern applies to each neighborhood, it has the potential to fragment incentives, with everyone acting rationally on their own self-interest, making everyone in the city, country, or world worse off in the long run. Because of the reciprocal nature of this dynamic, it can be described as a multipolar trap: a type of coordination problem in which everyone would prefer a different overall outcome that could in theory be achieved if everyone cooperated, but each individual is incentivized to do what’s best for themself in the short term, so everyone is stuck with an undesirable general outcome.

For a long time, cities and the people within them lacked any kind of effective coordination mechanism to overcome this dynamic. That resulted in fewer homes being built than were needed and the cost of homes increasing far faster than overall economic growth consistently from 1920 through 2020. The cost of renting appreciated similarly, accelerating a transfer of wealth to the land-owning class.

That trend began to change with the introduction of Groma. Just as GigaJoule enabled consumers to express a strong preference for renewable energy sources and resulted in the Second Green Revolution slowing the pace of global warming, and the broad adoption of Asclepius increased average life spans over the last 50 years, the adoption of Groma created a fundamental shift in the real estate industry.

How did this occur? A few steps had to happen.

It’s a really tough question, and one where the answer tends to vary across regions. Polis began as an experiment in distributed, anonymous blockchain voting. But because it’s not government-sponsored and therefore inherently non-binding, how it was used became open to a lot of natural experimentation.

By convention, there are seven Strata regions created around each proposed project in a city, and voting is hosted on a secure, anonymous blockchain. The relative votes for and against in each Stratum are shown for each project. But then it gets more complicated! What does a city council do with that information? Those polling panels each represent a Stratum, a region of residents, whose perspective on a development can now be considered by the city council, along with the city bureaucrats and the voices of those able to attend the city meetings.

Over the last 50 years, each city has adopted its own mechanism of leveraging these polling panels. Some chose to ignore them entirely and continue with the previous limited-involvement decision-making systems. Some counted votes only within a certain distance, or adopted their own weighting system to value nearby votes higher than far away votes but still give everyone a say. The publicly validated nature of the blockchain gave credence to the votes, and more and more councils chose to utilize them, sometimes only as polls, but often as binding votes to drive their decisions.

This form of local development governance and distributed ownership is common nowadays, but was novel back when realcoins were first being introduced in the 2020s. Some scholars call the past few decades during which Groma has been dominant in urban areas the Era of Decoupled Housing, because urban property owners rarely live in spaces they fully own, but do nonetheless own more real estate wealth on average than in prior centuries. The resulting workforce mobility, interest in the future of the region as a whole instead of an individual property, and Polis have been broadly credited with a more efficient and equitable utilization and distribution of real estate than in the prior century.

While Groma is the largest of the realcoins today, it’s far from the only one. For the rest of class, you’ll be working in groups to investigate the history and effects of each of the other major realcoins in preparation for your homework tonight. You should see your groupmates' names on your SophOS.