Throughout history, various types of money have been used to facilitate trade and commerce. Some types of money are considered "soft money," meaning that their value is not backed by a physical commodity or by a strong centralized authority. Soft money has been used in many different forms, such as seashells, cowrie shells, salt, wampum beads, and paper money. While some soft money systems lasted for centuries, others collapsed due to a variety of reasons. In this article, we'll explore some examples of soft money throughout history and the reasons why they ultimately failed.
Seashells in Ancient China
According to archaeological findings, seashells were used in various forms, such as cowrie shells, as early as the Shang Dynasty (1600-1046 BCE) as a medium of exchange for goods and services. The seashell was believed to have medicinal properties and was considered a symbol of wealth and power. Initially, seashells were collected from the coast and it was considered valuable as it was rare and could not be found inland
As their popularity grew, seashells became a standard currency, and people started collecting them en masse. The rise in the supply of seashells caused inflation, which led to a loss in their value. This eventually made seashells impractical as currency, and they were replaced by metal coins. Historians believe that the first metal coins were created by the Zhou dynasty (1046-256 BCE) as a response to the inflation of seashells, and their use became widespread in China and other parts of the world.
Salt in Ancient Rome
Salt was one of the most essential commodities in Ancient Rome and was even used as a form of currency. The Roman soldiers were paid in salt which was known as "salarium argentum" (salt money), and is also where the word “salary” comes from.
Salt was used to preserve food and was essential to the Roman diet. However, as the Roman Empire expanded and salt production increased, the value of salt as a currency decreased. In addition, the government imposed fixed prices on salt which did not reflect its actual value. This caused a shortage of salt, leading to the creation of a black market where salt was traded at a much higher price than the government-fixed price.
Eventually, in order to resolve the problem of salt being overused and undervalued, the Roman government abolished the use of salt as currency and introduced a new currency system based on gold and silver coins. This change also provided a more stable and standardized currency.
Wampum Beads in Native American Cultures
Wampum beads held significant cultural and economic value in several Native American cultures, particularly among tribes in the Northeastern region of North America. Wampum beads were traditionally made from shells and served as a form of currency, but their value extended beyond mere exchange. These beads were intricately woven into belts and strings, carrying historical, ceremonial, and symbolic meanings.
In Native American societies, wampum beads were used for various purposes, including trade, treaties, and as a means of recording important events. They represented wealth, status, and spiritual significance within the communities. However, as European colonizers arrived in the region, the introduction of new trade goods and the disruption of traditional practices had a profound impact on the value of wampum beads.
Over time, the increasing availability of European trade items, such as metal coins and textiles, diminished the demand for wampum beads as a medium of exchange. The colonization and forced assimilation of Native American communities further eroded the cultural significance of wampum beads. Eventually, the use of wampum beads as currency declined, and they became more valued for their historical and cultural significance than for their economic utility.
Rai Stones on the Island of Yap
Rai stones were enormous limestone discs that served as a unique form of currency on the island of Yap in the Federated States of Micronesia. These massive stones, often several meters in diameter, were quarried from distant islands and then transported to Yap. The value of a rai stone was determined not only by its size but also by the story of its acquisition and ownership.
These stones were not physically moved during transactions but rather their ownership was transferred through an oral tradition. The stones were typically left in their original location while the community acknowledged the change in ownership. In a way, this oral tradition of ownership transfer resembled a sort of distributed ledger in that the community was keeping a mental note in regard to the ownership of each stone. Nobody could claim a rai stone was theirs if the rest of the community thought otherwise, and therefore they could not use it as theirs in order to transact.
This system of symbolic exchange allowed rai stones to function as a medium of value and facilitated trade and commerce within the community.
However, the demise of rai stones as a currency came when an Irish-American trader named David O'Keefe arrived on the island in the late 19th century. O'Keefe introduced modern dynamite to the Yapese, which enabled them to mine rai stones way more efficiently. This led to an increase in the supply of rai stones, causing their value to decline. Moreover, O'Keefe flooded the island with newly mined rai stones, which brought about inflation and destabilized the economy.
As a result, the Yapese community gradually shifted towards using more widely accepted forms of currency, such as the US dollar, for day-to-day transactions. Today, while the rai stones still hold cultural and historical significance on the island of Yap, they no longer function as a practical means of exchange.
Glass Beads in Western Africa
Glass beads played a significant role as a form of currency in various parts of Western Africa during the pre-colonial era. These brightly colored beads, often imported from Europe, were highly valued by local communities for their aesthetic appeal and cultural significance. They served as a medium of exchange in trade transactions and were also used for ceremonial and social purposes.
The use of glass beads as currency, however, faced challenges that ultimately led to their demise. One of the main issues was their susceptibility to counterfeiting. The increasing demand for glass beads prompted some individuals to produce imitations, diminishing the trust and value associated with genuine beads. Moreover, the influx of large quantities of glass beads through European traders disrupted the local economies, causing inflation and undermining the stability of the bead-based monetary system.
As European colonial powers expanded their influence in the region, they introduced alternative forms of currency, such as metal coins and paper money. These new currencies were more widely accepted and had inherent value, making them preferable over fragile and easily counterfeited glass beads. Over time, glass beads lost their prominence as a medium of exchange and were gradually replaced by more durable and universally recognized currencies.
Fiat Money in Zimbabwe
Fiat money refers to a currency that is not backed by a physical commodity like gold or silver but derives its value from the trust and confidence placed in the issuing authority (read: The Evolution of Money: From Barter to Bitcoin). One notable example of the issues associated with fiat money can be found in the case of Zimbabwe.
In the late 20th century, Zimbabwe went through a period of hyperinflation, which resulted in the rapid devaluation of the Zimbabwean dollar. The government printed money to finance its budget deficit, leading to a huge expansion of the supply of currency in circulation. This excessive money creation, coupled with a decline in production and economic mismanagement, triggered a cycle of increasing prices and decreasing purchasing power of the currency.
During this time, the Zimbabwean dollar experienced a staggering loss of value, rendering it practically worthless. Prices soared, reaching astronomical levels, and the economy spiraled into turmoil. One great example of the absurd inflation that hit the economy was the need for a 1 TRILLION(!) Zimbabwean Dollar bill to be printed.
The hyperinflationary episode in Zimbabwe serves as a cautionary example of the consequences of the unrestrained expansion of the money supply. It highlights the importance of sound monetary policies and responsible management of the money supply to maintain stability and preserve the value of a nation's currency.
Lessons Learned
Throughout history, the use of various forms of soft money has taught us valuable lessons about the challenges associated with relying on currencies lacking intrinsic value or a stable foundation. From seashells to salt, from wampum beads to Rai stones, and from glass beads to fiat money, these examples demonstrate the vulnerability of soft money to issues such as inflation, counterfeiting, and loss of confidence. They highlight the importance of a reliable medium of exchange that maintains its value over time. While soft money has faced inherent limitations and eventually faltered, the search for a more robust and dependable alternative has persisted. This brings us to the emergence of cryptocurrencies like Bitcoin, which aims to address the shortcomings of soft money and provide a decentralized, transparent, and secure medium of exchange.
Now, let's explore how Bitcoin overcomes the problems encountered by soft money throughout history and represents a potential solution for the future of currency.
Bitcoin Fixes This…
Soft money, defined by various historical examples such as the rampant inflation caused by excessive demand for seashells in ancient China and the destabilizing of glass beads in West Africa, has consistently suffered from weaknesses related to its supply and its value preservation.
In contrast, Bitcoin introduces a groundbreaking solution through its immutable protocol and capped supply. While soft money, like seashells, salt, or glass beads, faced challenges when overused or counterfeited due to limitless production, Bitcoin's hard cap of 21 million coins prevents such issues, ensuring a safeguard against inflation and manipulation.
Imagine if, in the past, there was a rule saying we can't make more seashells or beads past a certain amount. That's what Bitcoin does – it says, "No more than 21 million coins will ever exist." This strict rule prevents the overproduction that plagued soft money. It's like if everyone suddenly wanted those rare shells, they couldn't just make more; similarly, with Bitcoin, no one can suddenly make more coins, protecting its value from vanishing like soft money did. This cap also stops governments from printing tons of money, causing prices to go crazy, as seen with fiat money.
This intrinsic feature addresses the shortcomings witnessed in soft money scenarios and offers a digital alternative that maintains scarcity, value, and security.
In a later article, we’ll explore how the way Bitcoin is set up on a protocol level prevents anyone from changing the supply cap of 21 million coins, and how vey basic incentives ensure that it will probably remain that way.
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The Wampum Chronicles: The Story of Wampum Among the Native Peoples of the Northeastern United States by James W. Bradley.
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