paper currency essay

Essay on Currency

Students are often asked to write an essay on Currency in their schools and colleges. And if you’re also looking for the same, we have created 100-word, 250-word, and 500-word essays on the topic.

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100 Words Essay on Currency

What is currency.

Currency is a type of money that a country uses. It is a system of money in general use in a particular country. For example, in the United States, the currency is the dollar.

Types of Currency

There are two types of currency: paper money and coins. Paper money is printed on special paper. Coins are made from metal. Each type of currency has different values. For example, in the United States, coins come in denominations of 1, 5, 10, and 25 cents.

Use of Currency

Currency is used for buying and selling goods and services. It is an important part of our daily lives. Without currency, it would be difficult to trade or buy things.

Global Currencies

Different countries have different currencies. For example, Japan uses the Yen, the United Kingdom uses the Pound, and the European Union uses the Euro. When people travel, they often need to exchange their home country’s currency for the currency of the country they are visiting.

Digital Currency

In recent years, digital currency, like Bitcoin, has become popular. These are not physical money but are stored and used online. They can be used to buy goods and services on the internet.

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Advantages and Disadvantages of Currency

250 Words Essay on Currency

Currency is the system of money used in a country. It is a form of money that the government has approved for trade. Currency can be notes, coins, or digital money. For example, the U.S. uses dollars, the U.K. uses pounds, and Japan uses yen.

The Role of Currency

Currency plays a vital role in our daily lives. We use it to buy goods and services, like food, clothes, and education. It helps us measure the value of things. For example, if a toy costs $10, we know it’s worth ten one-dollar bills.

There are two main types of currency: physical and digital. Physical currency is the money we can touch, like coins and notes. Digital currency, on the other hand, is money that exists only on computers. This includes online bank accounts and digital wallets.

Exchange Rates

The value of one country’s currency compared to another’s is called the exchange rate. These rates can change daily. For example, one day, one U.S. dollar might be worth 0.85 euros. The next day, it could be worth 0.86 euros.

In conclusion, currency is a critical part of our world. It allows us to buy goods and services, and it helps us understand the value of things. Whether it’s physical or digital, every country has its own unique currency. Understanding currency and exchange rates can help us make smart decisions when traveling or trading with people from other countries.

500 Words Essay on Currency

Currency is the money that a country uses. It is a system of money that is accepted for buying and selling goods and services. Currency can come in different forms like coins, notes, and digital money.

There are two main types of currency: physical and digital. Physical currency is the one we can touch, like coins and notes. Every country has its own unique physical currency. For example, the United States uses dollars, the United Kingdom uses pounds, and Japan uses yen.

Digital currency, on the other hand, is money that exists only in electronic form. It is stored and transferred electronically through computers or mobile phones. An example of this is Bitcoin, which is a type of digital currency known as cryptocurrency.

Importance of Currency

Currency is very important in our daily life. It helps us buy things we need, like food and clothes. Without currency, it would be difficult to trade or do business. Imagine if we had to swap items directly for other items, it would be very hard to decide how many chickens are equal to one cow, for example.

Currency also helps us save for the future. We can keep money in a bank to use later. This is especially helpful for big things like buying a house or paying for college.

How Currency Works

The value of currency can change. This is often due to how much of it is available and how much people want it. If a lot of people want a certain type of currency, its value goes up. If not many people want it, its value goes down. This is called supply and demand.

For example, if lots of people want to buy dollars, the value of the dollar will go up. This means you need more of another currency to buy the same amount of dollars.

In conclusion, currency is a vital part of our daily lives. It allows us to buy and sell goods and services, and helps us save for the future. Whether it’s physical or digital, each type of currency has its own unique value. Understanding how currency works can help us make smart decisions about money. Remember, the value of currency can change, so it’s always a good idea to keep an eye on it.

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What Is Paper Money?

Understanding paper money, special considerations, the bottom line.

Macroeconomics

Paper Money: Definition, History, Use, Need for It, and Examples

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

Paper money is a country's official, paper currency that is circulated for the transactions involved in acquiring goods and services. The printing of paper money is typically regulated by a country's central bank or treasury in order to keep the flow of funds in line with monetary policy .

Paper money tends to be updated with new versions that contain security features and attempt to make it more difficult for counterfeiters to create illegal copies.

Key Takeaways

Paper money is a country's official, paper currency that is circulated for the transactions involved in acquiring goods and services.
The printing of paper money is typically regulated by a country's central bank or treasury in order to keep the flow of funds in line with monetary policy.

The first recorded use of paper money was purported to be in the country of China during the 7th century A.D. as a means of reducing the need to carry heavy and cumbersome strings of metallic coins to conduct transactions. Similar to making a deposit at a modern bank, individuals would transfer their coins to a trustworthy party and then receive a note denoting how much money they had deposited. The note could then be redeemed for currency at a later date.

Example of Paper Money

In the U.S., paper money is considered fiat money . This means that it has no actual value except as an accepted medium of exchange. Before 1971, this was not the case; U.S. banknotes were backed by a certain amount of gold, which was dictated by the Federal Reserve .

The U.S. dollar has been the dominant reserve currency since the end of World War II. Prior to World War II, the British pound was the dominant reserve currency.

There are 17 countries and territories that use the U.S. dollar as their currency. These include Ecuador, El Salvador, American Samoa, Guam, Micronesia, Panama, and Zimbabwe. There are also many countries that peg their currency to the U.S. dollar, including Lebanon, Hong Kong, and Saudi Arabia.

There are also countries that regularly use the U.S. dollar alongside their own, such as Mexico, Canada, and Costa Rica. The U.S. dollar is so widely used that 60% of globally disclosed official foreign reserves were in U.S. dollars as of 2021. This compares to 21% for the euro, 6% for the Japanese yen, 5% for the British pound, and 2% for the Chinese renminbi.

The euro is another form of paper money that is used in multiple countries. As of 2023, 20 of the 27 member states in the European Union ( EU ) use the euro as their official currency.

While paper money is the most accepted medium of exchange, companies often issue shares of their own company to purchase other companies and reward their staff. Shares are units of ownership in a company that entitle the shareholder to an equal distribution of any profits. Of all accepted mediums of exchange, shares are closest to paper money because they can be exchanged on the open market for cash.

Is Paper Money Fiat Money?

Yes, paper money is fiat money. Fiat money is any money that is considered legal tender. Paper money and coins are legal tender.

Is Crypto Fiat Money?

Cryptocurrencies are not fiat money. Fiat money is determined by a nation's government and the government decides what money can be accepted as legal tender. Cryptocurrencies are not authorized by most governments as legal tender.

Is Money Still Printed?

Yes, money is still printed, as paper money and coins are still used as legal tender throughout the nation. The U.S. Bureau of Engraving & Printing is responsible for the design and printing of U.S. paper money.

With the advent of credit cards and digital payments, paper money is not as commonly used as it once was. Many establishments in developed cities around the world no longer accept paperless money; however, paper money is still used extensively in nations and businesses that haven't incorporated digital payments into their infrastructure.

Guinness World Record. " First Paper Money ."

EveryCRSReport. " Brief History of the Gold Standard in the United States ."

Congressional Research Service. " The U.S. Dollar as the World’s Dominant Reserve Currency ."

World Population Review. " Countries that Use the U.S. Dollar 2023 ."

Board of Governors of the Federal Reserve System. " The International Role of the U.S. Dollar ."

European Union. " Countries Using the Euro ."

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Advantages & Disadvantages of Using Paper Currency

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A dollar bill, also known as a Federal Reserve Note, is a form of fiat currency that makes the trading of goods and services easier by not having to carry around large items in exchange for those goods and services. Paper money has many advantages, but it also many dangers that can hinder the very value of the denomination it is intended to represent. Weighing these advantages and disadvantages has become a subject of great political debate.

Advantages of paper currency are that it's easy to use and cheap to produce and can be created on demand. Disadvantages are that it is fragile and its value is subject to inflation and changes in public confidence.

Advantage: Convenient to Use

Paper money comes in many denominations, which allows you to carry large amounts of legal tender without having to move large, bulky forms of money. It takes up little space and is widely recognized as a note of value that can be traded for any goods or services. Five $1 bills take up as much space as five $20 bills, so it is an easily fungible and convertible form of money, unlike gold or any other asset.

Advantage: Cheap to Produce

Not only is paper money small and transportable, but it also is much cheaper to produce than the value it may represent. According the U.S. Bureau of Engraving and Printing, as of 2018, it costs as little as 5.6 cents to produce a $1 bill and up to 13.2 cents to produce a $100 bill. Notes generally last between 4.5 and 15 years before they need to be replaced.

Advantage: Created at Will

Unlike any other store of wealth, paper money can be printed at will by the Bureau of Engraving and Printing. If there is a need, such as in times of a national emergency or monetary deflation, the bureau can print and release as many bills as needed to resupply the population with paper money.

Disadvantage: Subject to Inflation

Conversely, printing too much paper money as required to sustain moderate growth can lead to high rates of inflation. As the number of legal notes increases, the value of those notes decreases because more dollars are chasing relatively fewer goods and services, which causes prices to rise. If inflation gets out of control, it can lead to hyperinflation where a vicious cycle of printing new money is needed to make up for the fact that old money is perpetually losing value.

Disadvantage: Public Confidence

Paper money is valued by a nation's citizens only if all of those citizens agree to have the same confidence in that currency to represent the value stated on it. If public confidence fades, whether because of high national debt or political turmoil, chaos can ensue where goods and services will be traded only in kind, meaning paper money can become practically useless. This happened in the Weimar Republic in Germany during the 1920s and was happening in Zimbabwe in 2008, where inflation was running at an annual rate of 89 sextillion percent.

Disadvantage: Fragility

Paper money is susceptible to accidental tearing, shredding, burning and being run through the laundry. Federal Reserve Notes are not insurable by the U.S. government but can be replaced if enough of the damaged note remains. Damaged or mutilated notes can be submitted to the Bureau of Engraving and Printing in Washington, D.C., where an examiner will determine whether they can be replaced at full value.

Government Grants and Loans | USAGov
Board of Governors of the Federal Reserve System: How Much Does It Cost to Produce Currency and Coin?
Board of Governors of the Federal Reserve System: How Long Is the Lifespan of U.S. Paper Money?

Dax Wagner has been writing professionally since 1994. His creative work includes "The Bin" for Scanbox International and "Get Out Of Jail Free" for Asylum Entertainment. He has also been a contributor to AOL's Digital City and writes online articles covering various topics from entertainment to personal finance. Wagner received his Bachelor of Arts from the University of Southern California's School of Cinema and Television.

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Paper money is an invention of the Song Dynasty in China in the 11th century CE, nearly 20 centuries after the earliest known use of metal coins. While paper money was certainly easier to carry in large amounts, using paper money had its risks: counterfeiting and inflation.

Earliest Money

The earliest known form of money is also from China, a cast copper coin from the 11th century BCE, which was found in a Shang Dynasty tomb in China. Metal coins, whether made from copper, silver, gold, or other metals, have been used across the globe as units of trade and value. They have advantages—they are durable, difficult to counterfeit, and they hold intrinsic value. The big disadvantage? If you have very many of them, they get heavy.

For a couple thousand years after the coins were buried in that Shang tomb, however, merchants, traders, and customers in China had to put up with carrying coins, or with bartering goods for other goods directly. Copper coins were designed with square holes in the middle so that they could be carried on a string. For large transactions, traders calculated the price as the number of coin strings. It was workable, but an unwieldy system at best.

Paper Money Takes the Load Off

During the Tang Dynasty (618–907 CE), however, merchants began to leave those heavy strings of coins with a trustworthy agent, who would record how much money the merchant had on deposit on a piece of paper. The paper, a sort of promissory note, could then be traded for goods, and the seller could go to the agent and redeem the note for the strings of coins. With trade renewed along the Silk Road, this simplified cartage considerably. These privately-produced promissory notes were still not true paper currency, however.

At the beginning of the Song Dynasty (960–1279 CE), the government licensed specific deposit shops where people could leave their coins and receive notes. In the 1100s, Song authorities decided to take direct control of this system, issuing the world's first proper, government-produced paper money. This money was called jiaozi .

Jiaozi under the Song

The Song established factories to print paper money with woodblocks, using six colors of ink. The factories were located in Chengdu, Hangzhou, Huizhou, and Anqi, and each used different fiber mixes in their paper to discourage counterfeiting. Early notes expired after three years, and could only be used in particular regions of the Song Empire.

In 1265, the Song government introduced a truly national currency, printed to a single standard, usable across the empire, and backed by silver or gold. It was available in denominations between one and one hundred strings of coins. This currency lasted only nine years, however, because the Song Dynasty tottered, falling to the Mongols in 1279.

Mongol Influence

The Mongol Yuan Dynasty , founded by Kublai Khan (1215–1294), issued its own form of paper currency called chao; the Mongols brought it to Persia where it was called djaou or djaw . The Mongols also showed it to Marco Polo (1254–1324) during his 17-year-long stay in Kublai Khan's court, where he was amazed by the idea of government-backed currency. However, the paper money was not backed by gold or silver. The short-lived Yuan Dynasty printed increasing amounts of the currency, leading to runaway inflation. This problem was unresolved when the dynasty collapsed in 1368.

Although the succeeding Ming Dynasty (1368–1644) also began by printing unbacked paper money, it suspended the program in 1450. For much of the Ming era, silver was the currency of choice, including tons of Mexican and Peruvian ingots brought to China by Spanish traders. Only in the last two, desperate years of Ming rule did the government print paper money, as it attempted to fend off the rebel Li Zicheng and his army. China did not print paper money again until the 1890s when the Qing Dynasty began producing yuan .

Lande, Lawrence, and T. I. M. Congdon. " John Law and the Invention of Paper Money. " RSA Journal 139.5414 (1991): 916–28. Print.
Lui, Francis T. " Cagan's Hypothesis and the First Nationwide Inflation of Paper Money in World History. " Journal of Political Economy 91.6 (1983): 1067–74. Print.
Pickering, John. " The History of Paper Money in China ." Journal of the American Oriental Society 1.2 (1844): 136–42. Print.
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The nature and necessity of a paper-currency, 3 april 1729, the nature and necessity of a paper-currency.

A Modest Enquiry into the Nature and Necessity of a Paper-Currency. Philadelphia: Printed and Sold at the New Printing-Office, near the Market. 1729. 6 (Historical Society of Pennsylvania)

Pennsylvania’s first experience with paper currency came in 1723 with the passage of two acts which provided for issues of bills of credit totaling £45,000. Except for £7,500 allocated to governmental agencies for public expenditure, the new currency was to be loaned to private individuals at 5 per cent interest for specified terms of years on the security of real-estate mortgages. The borrowers were to repay the principal in equal annual installments and the bills of credit received in payment were to be canceled and destroyed. The last of the loans would be repaid and the last bills of credit “sunk” in 1736. 7 But in 1726, when almost £5,000 of the paper money had been retired, complaint about the shrinking currency induced the Assembly to halt the further destruction of the bills and to authorize instead their reissue on new mortgage loans. 8

During the next few years paper currency became a major issue. Many believed the acts of 1723 and 1726 had greatly promoted the prosperity of Pennsylvania; others, including the more conservative inhabitants, the proprietors in England, and officials of the British government, feared inflation and serious depreciation of the paper money such as had already taken place in New England and South Carolina. The Assembly, acting on several petitions, sent to the governor in February 1729 a bill for a large new emission of bills of credit, with a lower interest rate on the mortgage loans and a longer term for retirement than any earlier Pennsylvania act had provided. Governor Patrick Gordon favored paper currency but objected to the terms of the bill. Prolonged discussions followed between governor and Assembly. 9

While these negotiations were in progress Franklin joined the debate. He and his friends had discussed the matter in the Junto, he wrote many years later in his autobiography, and he was “on the Side of an Addition.” He remembered the stagnant condition of the city when he “first walk’d about the Streets of Philadelphia, eating my Roll,” in 1723 just before the first of the currency acts began to take effect, and by contrast the prosperity that had followed. He attributed the great improvement to the more plentiful supply of a circulating medium. “Our Debates possess’d me so fully of the Subject, that I wrote and printed an anonymous Pamphlet on it, entituled, The Nature and Necessity of a Paper Currency .” This essay was dated April 3, 1729, and was one of the first of the publications issued by the new firm of Franklin and Meredith “at the New Printing-Office near the Market.”

The first part of this paper is a discussion of the importance of an adequate supply of money for the successful conduct of a community’s business. The treatment is general but has particular application to a colonial area such as Pennsylvania. Some of Franklin’s ideas may have been derived from his reading; others doubtless reflected the discussion then going on in the province at large and among his friends in the Junto. The second part of the essay deals with the specific question of how much paper currency might be safe for a community and how it should be secured to avoid the danger of a serious depreciation. Here Franklin relied heavily on his reading, especially on Sir William Petty’s Treatise of Taxes and Contributions , first published in 1662. 1 At one point his presentation of the labor theory of value employs the same argument, the same illustrations, and even some of the same phrases that Petty had used in his pioneer discussion of this matter. 2 And Franklin’s statement of the “natural standard” of interest (usury, as he called it) is, with a short interpolation, almost an exact transcription of Petty’s words on this subject. 3 Franklin’s own contribution here does not derive from its originality but from his ability to apply existing ideas to the immediate problem in language that would be understandable to his Pennsylvania readers. 4

The pamphlet appeared while the governor and the Assembly were trying to work out a compromise measure. The negotiations were successful and on May 10 Governor Gordon signed a bill providing for the emission of £30,000 in bills of credit on conditions very much like those of the two acts of 1723. Interest was again set at 5 per cent, though the Assembly (and Franklin) had both favored 4 per cent, and the term of the loans was established at sixteen years, though the governor had wanted it to be only ten. 5 Franklin believed that his pamphlet had helped secure this favorable measure. Friends in the Assembly, he wrote later, “who conceiv’d I had been of some Service, thought fit to reward me, by employing me in printing the Money, a very profitable Jobb, and a great Help to me. This was another Advantage gain’d by my being able to write.” Here Franklin’s memory was somewhat at fault. Actually it was Andrew Bradford who printed the £30,000 voted in 1729, 6 but when the Assembly authorized £40,000 more in 1731 that printing contract did go to Franklin. For this job he received £100. 7

A MODEST ENQUIRY, &C.

There is no Science, the Study of which is more useful and commendable than the Knowledge of the true Interest of one’s Country; and perhaps there is no Kind of Learning more abstruse and intricate, more difficult to acquire in any Degree of Perfection than This, and therefore none more generally neglected. Hence it is, that we every Day find Men in Conversation contending warmly on some Point in Politicks, which, altho’ it may nearly concern them both, neither of them understand any more than they do each other.

Thus much by way of Apology for this present Enquiry into the Nature and Necessity of a Paper Currency. And if any Thing I shall say, may be a Means of fixing a Subject that is now the chief Concern of my Countrymen, in a clearer Light, I shall have the Satisfaction of thinking my Time and Pains well employed.

To proceed, then,

There is a certain proportionate Quantity of Money requisite to carry on the Trade of a Country freely and currently; More than which would be of no Advantage in Trade, and Less, if much less, exceedingly detrimental to it.

This leads us to the following general Considerations.

First, A great Want of Money in any Trading Country, occasions Interest to be at a very high Rate . And here it may be observed, that it is impossible by any Laws to restrain Men from giving and receiving exorbitant Interest, where Money is suitably scarce: For he that wants Money will find out Ways to give 10 per Cent. when he cannot have it for less, altho’ the Law forbids to take more than 6 per Cent. Now the Interest of Money being high is prejudicial to a Country several Ways: It makes Land bear a low Price, because few Men will lay out their Money in Land, when they can make a much greater Profit by lending it out upon Interest: And much less will Men be inclined to venture their Money at Sea, when they can, without Risque or Hazard, have a great and certain Profit by keeping it at home; thus Trade is discouraged. And if in two Neighbouring Countries the Traders of one, by Reason of a greater Plenty of Money, can borrow it to trade with at a lower Rate than the Traders of the other, they will infallibly have the Advantage, and get the greatest Part of that Trade into their own Hands; For he that trades with Money he hath borrowed at 8 or 10 per Cent. cannot hold Market with him that borrows his Money at 6 or 4. — On the contrary, A plentiful Currency will occasion Interest to be low: And this will be an Inducement to many to lay out their Money in Lands, rather than put it out to Use, by which means Land will begin to rise in Value and bear a better Price: And at the same Time it will tend to enliven Trade exceedingly, because People will find more Profit in employing their Money that Way than in Usury; and many that understand Business very well, but have not a Stock sufficient of their own, will be encouraged to borrow Money to trade with, when they can have it at moderate Interest.

Secondly, Want of Money in a Country reduces the Price of that Part of its Produce which is used in Trade: Because Trade being discouraged by it as above, there is a much less Demand for that Produce. And this is another Reason why Land in such a Case will be low, especially where the Staple Commodity of the Country is the immediate Produce of the Land, because that Produce being low, fewer People find an Advantage in Husbandry, or the Improvement of Land. — On the contrary, A Plentiful Currency will occasion the Trading Produce to bear a good Price: Because Trade being encouraged and advanced by it, there will be a much greater Demand for that Produce; which will be a great Encouragement of Husbandry and Tillage, and consequently make Land more valuable, for that many People would apply themselves to Husbandry, who probably might otherwise have sought some more profitable Employment.

As we have already experienced how much the Increase of our Currency by what Paper Money has been made, has encouraged our Trade; particularly to instance only in one Article, Ship-Building; it may not be amiss to observe under this Head, what a great Advantage it must be to us as a Trading Country, that has Workmen and all the Materials proper for that Business within itself, to have Ship-Building as much as possible advanced: For every Ship that is built here for the English Merchants, gains the Province her clear Value in Gold and Silver, which must otherwise have been sent Home for Returns in her Stead; and likewise, every Ship built in and belonging to the Province, not only saves the Province her first Cost, but all the Freight, Wages and Provisions she ever makes or requires as long as she lasts; provided Care is taken to make This her Pay Port , and that she always takes Provisions with her for the whole Voyage, which may easily be done. And how considerable an Article this is yearly in our Favour, every one, the least acquainted with mercantile Affairs, must needs be sensible; for if we could not Build our selves, we must either purchase so many Vessels as we want from other Countries, or else Hire them to carry our Produce to Market, which would be more expensive than Purchasing; and on many other Accounts exceedingly to our Loss. Now as Trade in general will decline where there is not a plentiful Currency, so Ship-Building must certainly of Consequence decline where Trade is declining.

Thirdly, Want of Money in a Country discourages Labouring and Handicrafts Men (which are the chief Strength and Support of a People) from coming to settle in it, and induces many that were settled to leave the Country, and seek Entertainment and Employment in other Places, where they can be better paid. For what can be more disheartning to an industrious labouring Man, than this, that after he hath earned his Bread with the Sweat of his Brows, he must spend as much Time, and have near as much Fatigue in getting it, as he had to earn it. And nothing makes more bad Paymasters than a general Scarcity of Money. And here again is a Third Reason for Land’s bearing a low Price in such a Country, because Land always increases in Value in Proportion with the Increase of the People settling on it, there being so many more Buyers; and its Value will infallibly be diminished, if the Number of its Inhabitants diminish. — On the contrary, A Plentiful Currency will encourage great Numbers of Labouring and Handicrafts Men to come and Settle in the Country , by the same Reason that a Want of it will discourage and drive them out. Now the more Inhabitants, the greater Demand for Land (as is said above) upon which it must necessarily rise in Value, and bear a better Price. The same may be said of the Value of House-Rent, which will be advanced for the same Reasons; and by the Increase of Trade and Riches People will be enabled to pay greater Rents. Now the Value of House-Rent rising, and Interest becoming low, many that in a Scarcity of Money practised Usury, will probably be more inclined to Building; which will likewise sensibly enliven Business in any Place; it being an Advantage not only to Brickmakers, Bricklayers, Masons, Carpenters, Joiners, Glaziers , and several other Trades immediately employ’d by Building, but likewise to Farmers, Brewers, Bakers, Taylors, Shoemakers, Shop-keepers , and in short to every one that they lay their Money out with.

Fourthly, Want of Money in such a Country as ours, occasions a greater Consumption of English and European Goods, in Proportion to the Number of the People, than there would otherwise be. Because Merchants and Traders, by whom abundance of Artificers and labouring Men are employed, finding their other Affairs require what Money they can get into their hands, oblige those who work for them to take one half, or perhaps two thirds Goods in Pay. By this Means a greater Quantity of Goods are disposed of, and to a greater Value; because Working Men and their Families are thereby induced to be more profuse and extravagant in fine Apparel and the like, than they would be if they were obliged to pay ready Money for such Things after they had earn’d and received it, or if such Goods were not imposed upon them, of which they can make no other Use: For such People cannot send the Goods they are paid with to a Foreign Market, without losing considerably by having them sold for less than they stand ’em in here; neither can they easily dispose of them at Home, because their Neighbours are generally supplied in the same Manner; But how unreasonable would it be, if some of those very Men who have been a Means of thus forcing People into unnecessary Expence, should be the first and most earnest in accusing them of Pride and Prodigality . Now tho’ this extraordinary Consumption of Foreign Commodities may be a Profit to particular Men, yet the Country in general grows poorer by it apace. — On the contrary, As A plentiful Currency will occasion a less Consumption of European Goods, in Proportion to the Number of the People , so it will be a means of making the Balance of our Trade more equal than it now is, if it does not give it in our Favour; because our own Produce will be encouraged at the same Time. And it is to be observed, that tho’ less Foreign Commodities are consumed in Proportion to the Number of People, yet this will be no Disadvantage to the Merchant, because the Number of People increasing, will occasion an increasing Demand of more Foreign Goods in the Whole.

Thus we have seen some of the many heavy Disadvantages a Country (especially such a Country as ours) must labour under, when it has not a sufficient Stock of running Cash to manage its Trade currently. And we have likewise seen some of the Advantages which accrue from having Money sufficient, or a Plentiful Currency.

The foregoing Paragraphs being well considered, we shall naturally be led to draw the following Conclusions with Regard to what Persons will probably be for or against Emitting a large Additional Sum of Paper Bills in this Province.

1. Since Men will always be powerfully influenced in their Opinions and Actions by what appears to be their particular Interest: Therefore all those, who wanting Courage to venture in Trade, now practise Lending Money on Security for exorbitant Interest, which in a Scarcity of Money will be done notwithstanding the Law, I say all such will probably be against a large Addition to our present Stock of Paper-Money; because a plentiful Currency will lower Interest, and make it common to lend on less Security.

2. All those who are Possessors of large Sums of Money, and are disposed to purchase Land, which is attended with a great and sure Advantage in a growing Country as this is; I say, the Interest of all such Men will encline them to oppose a large Addition to our Money. Because their Wealth is now continually increasing by the large Interest they receive, which will enable them (if they can keep Land from rising) to purchase More some time hence than they can at present; and in the mean time all Trade being discouraged, not only those who borrow of them, but the Common People in general will be impoverished, and consequently obliged to sell More Land for less Money than they will do at present. And yet, after such Men are possessed of as much Land as they can purchase, it will then be their Interest to have Money made Plentiful, because that will immediately make Land rise in Value in their Hands. Now it ought not to be wonder’d at, if People from the Knowledge of a Man’s Interest do sometimes make a true Guess at his Designs; for, Interest , they say, will not Lie .

3. Lawyers, and others concerned in Court Business, will probably many of them be against a plentiful Currency; because People in that Case will have less Occasion to run in Debt, and conesquently less Occasion to go to Law and Sue one another for their Debts. Tho’ I know some even among these Gentlemen, that regard the Publick Good before their own apparent private Interest.

4. All those who are any way Dependants on such Persons as are above mentioned, whether as holding Offices, as Tenants, or as Debtors, must at least appear to be against a large Addition; because if they do not, they must sensibly feel their present Interest hurt. And besides these, there are, doubtless, many well-meaning Gentlemen and Others, who, without any immediate private Interest of their own in View, are against making such an Addition, thro’ an Opinion they may have of the Honesty and sound Judgment of some of their Friends that oppose it,(perhaps for the Ends aforesaid) without having given it any thorough Consideration themselves. And thus it is no Wonder if there is a powerful Party on that Side.

On the other Hand, Those who are Lovers of Trade, and delight to see Manufactures encouraged, will be for having a large Addition to our Currency: For they very well know, that People will have little Heart to advance Money in Trade, when what they can get is scarce sufficient to purchase Necessaries, and supply their Families with Provision. Much less will they lay it out in advancing new Manufactures; nor is it possible new Manufactures should turn to any Account, where there is not Money to pay the Workmen, who are discouraged by being paid in Goods, because it is a great Disadvantage to them.

Again, Those who are truly for the Proprietor’s Interest (and have no separate Views of their own that are predominant) will be heartily for a large Addition: Because, as I have shewn above, Plenty of Money will for several Reasons make Land rise in Value exceedingly: And I appeal to those immediately concerned for the Proprietor in the Sale of his Lands, whether Land has not risen very much since the first Emission of what Paper Currency we now have, and even by its Means. Now we all know the Proprietary has great Quantities to sell.

And since a Plentiful Currency will be so great a Cause of advancing this Province in Trade and Riches, and increasing the Number of its People; which, tho’ it will not sensibly lessen the Inhabitants of Great Britain, will occasion a much greater Vent and Demand for their Commodities here; and allowing that the Crown is the more powerful for its Subjects increasing in Wealth and Number, I cannot think it the Interest of England to oppose us in making as great a Sum of Paper Money here, as we, who are the best Judges of our own Necessities, find convenient. And if I were not sensible that the Gentlemen of Trade in England, to whom we have already parted with our Silver and Gold, are misinformed of our Circumstances, and therefore endeavour to have our Currency stinted to what it now is, I should think the Government at Home had some Reasons for discouraging and impoverishing this Province, which we are not acquainted with.

It remains now that we enquire, Whether a large Addition to our Paper Currency will not make it sink in Value very much; And here it will be requisite that we first form just Notions of the Nature and Value of Money in general.

As Providence has so ordered it, that not only different Countries, but even different Parts of the same Country, have their peculiar most suitable Productions; and likewise that different Men have Genius’s adapted to Variety of different Arts and Manufactures, Therefore Commerce , or the Exchange of one Commodity or Manufacture for another, is highly convenient and beneficial to Mankind. As for Instance, A may be skilful in the Art of making Cloth, and B understand the raising of Corn; A wants Corn, and B Cloth; upon which they make an Exchange with each other for as much as each has Occasion, to the mutual Advantage and Satisfaction of both.

But as it would be very tedious, if there were no other Way of general Dealing, but by an immediate Exchange of Commodities; because a Man that had Corn to dispose of, and wanted Cloth for it, might perhaps in his Search for a Chapman to deal with, meet with twenty People that had Cloth to dispose of, but wanted no Corn; and with twenty others that wanted his Corn, but had no Cloth to suit him with. To remedy such Inconveniences, and facilitate Exchange, Men have invented Money , properly called a Medium of Exchange , because through or by its Means Labour is exchanged for Labour, or one Commodity for another. And whatever particular Thing Men have agreed to make this Medium of, whether Gold, Silver, Copper, or Tobacco; it is, to those who possess it (if they want any Thing) that very Thing which they want, because it will immediately procure it for them. It is Cloth to him that wants Cloth, and Corn to those that want Corn; and so of all other Necessaries, it is whatsoever it will procure. Thus he who had Corn to dispose of, and wanted to purchase Cloth with it, might sell his Corn for its Value in this general Medium, to one who wanted Corn but had no Cloth; and with this Medium he might purchase Cloth of him that wanted no Corn, but perhaps some other Thing, as Iron it may be, which this Medium will immediately procure, and so he may be said to have exchanged his Cloth for Iron; and thus the general Exchange is soon performed, to the Satisfaction of all Parties, with abundance of Facility.

For many Ages, those Parts of the World which are engaged in Commerce, have fixed upon Gold and Silver as the chief and most proper Materials for this Medium; they being in themselves valuable Metals for their Fineness, Beauty, and Scarcity. By these, particularly by Silver, it has been usual to value all Things else: But as Silver it self is of no certain permanent Value, being worth more or less according to its Scarcity or Plenty, therefore it seems requisite to fix upon Something else, more proper to be made a Measure of Values , and this I take to be Labour .

By Labour 8 may the Value of Silver be measured as well as other Things. As, Suppose one Man employed to raise Corn, while another is digging and refining Silver; at the Year’s End, or at any other Period of Time, the compleat Produce of Corn, and that of Silver, are the natural Price of each other; and if one be twenty Bushels, and the other twenty Ounces, then an Ounce of that Silver is worth the Labour of raising a Bushel of that Corn. Now if by the Discovery of some nearer, more easy or plentiful Mines, a Man may get Forty Ounces of Silver as easily as formerly he did Twenty, and the same Labour is still required to raise Twenty Bushels of Corn, then Two Ounces of Silver will be worth no more than the same Labour of raising One Bushel of Corn, and that Bushel of Corn will be as cheap at two Ounces, as it was before at one; cæteris paribus .

Thus the Riches of a Country are to be valued by the Quantity of Labour its Inhabitants are able to purchase, and not by the Quantity of Silver and Gold they possess; which will purchase more or less Labour, and therefore is more or less valuable, as is said before, according to its Scarcity or Plenty. As those Metals have grown much more plentiful in Europe since the Discovery of America, so they have sunk in Value exceedingly; for, to instance in England, formerly one Penny of Silver was worth a Days Labour, but now it is hardly worth the sixth Part of a Days Labour; because not less than Six-pence will purchase the Labour of a Man for a Day in any Part of that Kingdom; which is wholly to be attributed to the much greater Plenty of Money now in England than formerly. And yet perhaps England is in Effect no richer now than at that Time; because as much Labour might be purchas’d, or Work got done of almost any kind, for £100 then, as will now require or is now worth £600.

In the next Place let us consider the Nature of Banks emitting Bills of Credit , as they are at this Time used in Hamburgh, Amsterdam, London and Venice.

Those Places being Seats of vast Trade, and the Payment of great Sums being for that Reason frequent, Bills of Credit are found very convenient in Business; because a great Sum is more easily counted in Them, lighter in Carriage, concealed in less Room, and therefore safer in Travelling or Laying up, and on many other Accounts they are very much valued. The Banks are the general Cashiers of all Gentlemen, Merchants and great Traders in and about those Cities; there they deposite their Money, and may take out Bills to the Value, for which they can be certain to have Money again at the Bank at any Time: This gives the Bills a Credit; so that in England they are never less valuable than Money, and in Venice and Amsterdam they are generally worth more. And the Bankers always reserving Money in hand to answer more than the common Run of Demands (and some People constantly putting in while others are taking out) are able besides to lend large Sums, on good Security, to the Government or others, for a reasonable Interest, by which they are paid for their Care and Trouble; and the Money which otherwise would have lain dead in their Hands, is made to circulate again thereby among the People: And thus the Running Cash of the Nation is as it were doubled; for all great Payments being made in Bills, Money in lower Trade becomes much more plentiful: And this is an exceeding great Advantage to a Trading Country, that is not over-stock’d with Gold and Silver.

As those who take Bills out of the Banks in Europe, put in Money for Security; so here, and in some of the neighbouring Provinces, we engage our Land. Which of these Methods will most effectually secure the Bills from actually sinking in Value, comes next to be considered.

Trade in general being nothing else but the Exchange of Labour for Labour, the Value of all Things is, as I have said before, most justly measured by Labour. Now suppose I put my Money into a Bank, and take out a Bill for the Value; if this Bill at the Time of my receiving it, would purchase me the Labour of one hundred Men for twenty Days; but some time after will only purchase the Labour of the same Number of Men for fifteen Days; it is plain the Bill has sunk in Value one fourth Part. Now Silver and Gold being of no permanent Value; and as this Bill is founded on Money, and therefore to be esteemed as such, it may be that the Occasion of this Fall is the increasing Plenty of Gold and Silver, by which Money is one fourth Part less valuable than before, and therefore one fourth more is given of it for the same Quantity of Labour; and if Land is not become more plentiful by some proportionate Decrease of the People, one fourth Part more of Money is given for the same Quantity of Land, whereby it appears that it would have been more profitable to me to have laid that Money out in Land which I put into the Bank, than to place it there and take a Bill for it. And it is certain that the Value of Money has been continually sinking in England for several Ages past, because it has been continually increasing in Quantity. But if Bills could be taken out of a Bank in Europe on a Land Security, it is probable the Value of such Bills would be more certain and steady, because the Number of Inhabitants continue to be near the same in those Countries from Age to Age.

For as Bills issued upon Money Security are Money, so Bills issued upon Land, are in Effect Coined Land .

Therefore (to apply the Above to our own Circumstances) If Land in this Province was falling, or any way likely to fall, it would behove the Legislature most carefully to contrive how to prevent the Bills issued upon Land from falling with it. But as our People increase exceedingly, and will be further increased, as I have before shewn, by the Help of a large Addition to our Currency; and as Land in consequence is continually rising, So, in case no Bills are emitted but what are upon Land Security, the Money-Acts in every Part punctually enforced and executed, the Payments of Principal and Interest being duly and strictly required, and the Principal bona fide sunk according to Law, it is absolutely impossible such Bills should ever sink below their first Value, or below the Value of the Land on which they are founded. In short, there is so little Danger of their sinking, that they would certainly rise as the Land rises, if they were not emitted in a proper Manner for preventing it; That is, by providing in the Act That Payment may be made, either in those Bills, or in any other Bills made current by any Act of the Legislature of this Province; and that the Interest, as it is received, may be again emitted in Discharge of Publick Debts; whereby circulating it returns again into the Hands of the Borrowers, and becomes Part of their future Payments; and thus as it is likely there will not be any Difficulty for want of Bills to pay the Office, they are hereby kept from rising above their first Value: For else, supposing there should be emitted upon mortgaged Land its full present Value in Bills; as in the Banks in Europe the full Value of the Money deposited is given out in Bills; and supposing the Office would take nothing but the same Sum in those Bills in Discharge of the Land; as in the Banks aforesaid, the same Sum in their Bills must be brought in, in order to receive out the Money: In such Case the Bills would most surely rise in Value as the Land rises; as certainly as the Bank Bills founded on Money would fall if that Money was falling. Thus if I were to mortgage to a Loan-Office, or Bank, a Parcel of Land now valued at £100 in Silver, and receive for it the like Sum in Bills, to be paid in again at the Expiration of a certain Term of Years; before which, my Land rising in Value, becomes worth £150 in Silver: ’Tis plain, that if I have not these Bills in Possession, and the Office will take nothing but these Bills, or else what it is now become worth in Silver, in Discharge of my Land; I say it appears plain, that those Bills will now be worth £150 in Silver to the Possessor; and if I can purchase them for less, in order to redeem my Land, I shall by so much be a Gainer.

I need not say any Thing to convince the Judicious that our Bills have not yet sunk, tho’ there is and has been some Difference between them and Silver; because it is evident that that Difference is occasioned by the Scarcity of the latter, which is now become a Merchandize, rising and falling, like other Commodities, as there is a greater or less Demand for it, or as it is more or less Plenty.

Yet farther, in order to make a true Estimate of the Value of Money, we must distinguish between Money as it is Bullion, which is Merchandize, and as by being coin’d it is made a Currency: For its Value as a Merchandize, and its Value as a Currency, are two distinct Things; and each may possibly rise and fall in some Degree independent of the other. Thus if the Quantity of Bullion increases in a Country, it will proportionably decrease in Value; but if at the same Time the Quantity of current Coin should decrease, (supposing Payments may not be made in Bullion) what Coin there is will rise in Value as a Currency, i.e. People will give more Labour in Manufactures for a certain Sum of ready Money.

In the same Manner must we consider a Paper Currency founded on Land; as it is Land, and as it is a Currency:

Money as Bullion, or as Land, is valuable by so much Labour as it costs to procure that Bullion or Land.

Money, as a Currency, has an Additional Value by so much Time and Labour as it saves in the Exchange of Commodities.

If, as a Currency, it saves one Fourth Part of the Time and Labour of a Country; it has, on that Account, one Fourth added to its original Value.

When there is no Money in a Country, all Commerce must be by Exchange. Now if it takes one fourth Part of the Time and Labour of a Country, to exchange or get their Commodities exchanged; then, in computing their Value, that Labour of Exchanging must be added to the Labour of manufacturing those Commodities: But if that Time or Labour is saved by introducing Money sufficient, then the additional Value on Account of the Labour of Exchanging may be abated, and Things sold for only the Value of the Labour in making them; because the People may now in the same Time make one Fourth more in Quantity of Manufactures than they could before.

From these Considerations it may be gathered, that in all the Degrees between having no Money in a Country, and Money sufficient for the Trade, it will rise and fall in Value as a Currency, in Proportion to the Decrease or Increase of its Quantity: And if there may be at some Time more than enough, the Overplus will have no Effect towards making the Currency, as a Currency, of less Value than when there was but enough; because such Overplus will not be used in Trade, but be some other way disposed of.

If we enquire, How much per Cent. Interest ought to be required upon the Loan of these Bills; we must consider 9 what is the Natural Standard of Usury: And this appears to be, where the Security is undoubted, at least the Rent of so much Land as the Money lent will buy: For it cannot be expected that any Man will lend his Money for less than it would fetch him in as Rent if he laid it out in Land, which is the most secure Property in the World. But if the Security is casual, then a kind of Ensurance must be enterwoven with the simple natural Interest, which may advance the Usury very conscionably to any height below the Principal it self. Now among us, if the Value of Land is twenty Years Purchase, Five per Cent. is the just Rate of Interest for Money lent on undoubted Security. Yet if Money grows scarce in a Country, it becomes more difficult for People to make punctual Payments of what they borrow, Money being hard to be raised; likewise Trade being discouraged, and Business impeded for want of a Currency, abundance of People must be in declining Circumstances, and by these Means Security is more precarious than where Money is plenty. On such Accounts it is no wonder if People ask a greater Interest for their Money than the natural Interest; and what is above is to be look’d upon as a kind of Præmium for the Ensurance of those Uncertainties, as they are greater or less. Thus we always see, that where Money is scarce, Interest is high, and low where it is plenty. Now it is certainly the Advantage of a Country to make Interest as low as possible, as I have already shewn; and this can be done no other way than by making Money plentiful. And since, in Emitting Paper Money among us, the Office has the best of Security, the Titles to the Land being all skilfully and strictly examined and ascertained; and as it is only permitting the People by Law to coin their own Land, which costs the Government nothing, the Interest being more than enough to pay the Charges of Printing, Officers Fees, &c. I cannot see any good Reason why Four per Cent. to the Loan-Office should not be thought fully sufficient. As a low Interest may incline more to take Money out, it will become more plentiful in Trade; and this may bring down the common Usury, in which Security is more dubious, to the Pitch it is determined at by Law.

If it should be objected, That Emitting It at so low an Interest, and on such easy Terms, will occasion more to be taken out than the Trade of the Country really requires: It may be answered, That, as has already been shewn, there can never be so much of it emitted as to make it fall below the Land it is founded on; because no Man in his Senses will mortgage his Estate for what is of no more Value to him than That he has mortgaged, especially if the Possession of what he receives is more precarious than of what he mortgages, as that of Paper Money is when compared to Land: And if it should ever become so plenty by indiscreet Persons continuing to take out a large Overplus, above what is necessary in Trade, so as to make People imagine it would become by that Means of less Value than their mortgaged Lands, they would immediately of Course begin to pay it in again to the Office to redeem their Land, and continue to do so till there was no more left in Trade than was absolutely necessary. And thus the Proportion would find it self, (tho’ there were a Million too much in the Office to be let out) without giving any one the Trouble of Calculation.

It may perhaps be objected to what I have written concerning the Advantages of a large Addition to our Currency, That if the People of this Province increase, and Husbandry is more followed, we shall overstock the Markets with our Produce of Flower , &c. To this it may be answered, that we can never have too many People (nor too much Money) For when one Branch of Trade or Business is overstocked with Hands, there are the more to spare to be employed in another. So if raising Wheat proves dull, more may (if there is Money to support and carry on new Manufactures) proceed to the raising and manufacturing of Hemp, Silk, Iron , and many other Things the Country is very capable of, for which we only want People to work, and Money to pay them with.

Upon the Whole it may be observed, That it is the highest Interest of a Trading Country in general to make Money plentiful; and that it can be a Disadvantage to none that have honest Designs. It cannot hurt even the Usurers, tho’ it should sink what they receive as Interest; because they will be proportionably more secure in what they lend; or they will have an Opportunity of employing their Money to greater Advantage, to themselves as well as to the Country. Neither can it hurt those Merchants who have great Sums out-standing in Debts in the Country, and seem on that Account to have the most plausible Reason to fear it; to wit , because a large Addition being made to our Currency, will increase the Demand of our Exporting Produce, and by that Means raise the Price of it, so that they will not be able to purchase so much Bread or Flower with £100 when they shall receive it after such an Addition, as they now can, and may if there is no Addition: I say it cannot hurt even such, because they will get in their Debts just in exact Proportion so much the easier and sooner as the Money becomes plentier; and therefore, considering the Interest and Trouble saved, they will not be Losers; because it only sinks in Value as a Currency, proportionally as it becomes more plenty. It cannot hurt the Interest of Great Britain, as has been shewn; and it will greatly advance the Interest of the Proprietor. It will be an Advantage to every industrious Tradesman, &c. because his Business will be carried on more freely, and Trade be universally enlivened by it. And as more Business in all Manufactures will be done, by so much as the Labour and Time spent in Exchange is saved, the Country in general will grow so much the richer.

It is nothing to the Purpose to object the wretched Fall of the Bills in New-England and South-Carolina, unless it might be made evident that their Currency was emitted with the same Prudence, and on such good Security as ours is; and it certainly was not.

As this Essay is wrote and published in Haste, and the Subject in it self intricate, I hope I shall be censured with Candour, if, for want of Time carefully to revise what I have written, in some Places I should appear to have express’d my self too obscurely, and in others am liable to Objections I did not foresee. I sincerely desire to be acquainted with the Truth, and on that Account shall think my self obliged to any one, who will take the Pains to shew me, or the Publick, where I am mistaken in my Conclusions, And as we all know there are among us several Gentlemen of acute Parts and profound Learning, who are very much against any Addition to our Money, it were to be wished that they would favour the Country with their Sentiments on this Head in Print; which, supported with Truth and good Reasoning, may probably be very convincing. And this is to be desired the rather, because many People knowing the Abilities of those Gentlemen to manage a good Cause, are apt to construe their Silence in This, as an Argument of a bad One. Had any Thing of that Kind ever yet appeared, perhaps I should not have given the Publick this Trouble: But as those ingenious Gentlemen have not yet (and I doubt never will) think it worth their Concern to enlighten the Minds of their erring Countrymen in this Particular, I think it would be highly commendable in every one of us, more fully to bend our Minds to the Study of What is the true Interest of PENNSYLVANIA ; whereby we may be enabled, not only to reason pertinently with one another; but, if Occasion requires, to transmit Home such clear Representations, as must inevitably convince our Superiors of the Reasonableness and Integrity of our Designs.

Philadelphia, April 3. 1729. B. B.

6 . The title page contains a quotation from Persius, Satires , iii, 69–71:

“—Quid asper

Utile Nummus habet; patriae, carisque; propinquis

Quantum elargiri deceat, —”

7 . Laws of Pa. , 1742 edit., pp. 230–44, 269–87. For a general account of paper currency in Pennsylvania during this period see William Robert Shepherd, History of Proprietary Government in Pennsylvania (N.Y., 1896), chap. ix.

8 . Laws of Pa. , 1742 edit., pp. 321–33.

9 . 8 Pa. Arch. , iii, passim.

1 . Reprinted in Charles Henry Hull, ed., The Economic Writings of Sir William Petty (Cambridge, 1899), 1, 1–97.

2 . See below, p. 149 and note.

3 . See below, p. 153 and note.

4 . William A. Wetzel, Benjamin Franklin as an Economist (Baltimore, 1895), pp. 18–22, 30–2, discusses this pamphlet and first points out the parallel with Petty’s Treatise .

5 . Laws of Pa. , 1742 edit., pp. 364–81; 8 Pa. Arch. , III , 1949–64, passim.

6 . Ibid. , pp. 2025, 2043.

7 . See below, p. 174.

8 . This paragraph combines in paraphrase two passages in Sir William Petty, A Treatise of Taxes and Contributions (1662.), chap. IV , secs. 13–14, and chap. v, sec. 10, second paragraph.

9 . The passage from “we must consider” through “the Principal it self” follows almost literally the first half of Sir William Petty, A Treatise of Taxes and Contributions (1662), chap. v, sec. 3, except that BF has interpolated the words “For it cannot be expected” through “in the world.”

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Should We Get Rid of Paper Money: Advantages, Disadvantages, and Alternatives

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Published: Sep 5, 2023

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Introduction, advantages of getting rid of paper money, disadvantages of getting rid of paper money, alternatives to getting rid of paper money.

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The Blockchain Revolution: Decoding Digital Currencies

By David Andolfatto and Fernando M. Martin

Introduction

Few people took notice of an obscure white paper published in 2009 titled “Bitcoin: A Peer-to-Peer Electronic Cash System,” authored by a pseudonymous Satoshi Nakamoto. The lack of fanfare at the time is hardly surprising given that innovations in the way we make payments are not known to generate tremendous amounts of excitement, let alone inspire visions of a revolution in finance and corporate governance. But just over a decade later, the enthusiasm for cryptocurrencies and decentralized finance spawned by Bitcoin and blockchain technology has grown immensely and shows no signs of abating.

Because cryptocurrencies are money and payments systems, they have naturally drawn the interest of central banks and regulators. The Federal Reserve Bank of St. Louis was the first central banking organization to sponsor a public lecture on the topic: In March 2014, presenters outlined the big picture of cryptocurrencies and the blockchain by discussing its possibilities and pitfalls. Since that time, the Bank’s economists and research associates have published numerous articles and explainers on these topics, all of which are freely available to the general public. This essay represents a continuation of our effort to help educate the public and offer our perspective of the phenomenon as central bankers and economists.

Understanding how cryptocurrencies work “under the hood” is a challenge for most people because the protocols are written in computer code and the data are managed in an esoteric mathematical structure. To be fair, it’s difficult to understand any technical language (e.g., legalese, legislation and regulation). Because we are not technical experts in this space, we spend virtually no time discussing the technology in detail. For an accessible introduction to the technology, see Fabian Schär and Aleksander Berentsen’s “ Bitcoin, Blockchain, and Cryptoassets: A Comprehensive Introduction ,” MIT Press, 2020. What we offer instead is an overview of cryptocurrencies and blockchain technologies, explaining the spirit of the endeavor and how it compares with traditional operations.

In this essay, we explore four key areas:

Money, digital money and payments
Cryptocurrencies, blockchain and the double-spend problem of digital money
Understanding decentralized finance
The makeup of a central bank digital currency
Money, Digital Money and Payments

It is sometimes said that money is a form of social credit. One can think of this idea in the following way: When people go to work, they are in effect providing services to the community. They are helping to make others’ lives better in some way and, by engaging in this collective effort, make their own lives better as well.

In small communities, individual consumption and production decisions can be debited and credited, respectively, in a sort of communal ledger of action histories. This is because it is relatively easy for everyone to monitor and record individual actions. A person who has produced mightily for the group builds social credit. Large social credit balances can be “spent” later as consumption (favors drawn from other members of the community).

In large communities, individual consumption and production decisions are difficult to monitor. In communities the size of cities, for example, most people are strangers. Social credit based on a communal record-keeping system does not work when people are anonymous. See Narayana Kocherlakota’s “ The Technological Role of Fiat Money ,” Federal Reserve Bank of Minneapolis, Quarterly Review , 1998. Producers are rewarded for their efforts by accumulating money balances in wallets or bank accounts. Accumulated money balances can then be spent to acquire goods and services (or assets) from other members of the community, whose wallets and bank accounts are duly credited in recognition of their contributions. In this manner, money—like social credit—serves to facilitate the exchange of goods and services.

The monetary object representing this social credit may exist in physical or nonphysical form. In the United States, physical cash takes the form of small-denomination Federal Reserve bills and U.S. Treasury coins. Cash payments are made on a peer-to-peer (P2P) basis, for example, between customer and merchant. No intermediary is required for clearing and settling cash payments. As the customer debits his or her wallet, cash is credited to the merchant’s cash register, and the exchange is settled. Hardly any time is spent inspecting goods and money in small-value transactions. Some trust is required, of course, in the authority issuing the cash used in transactions. While that authority is typically the U.S. government, there is no law preventing households and businesses from accepting, say, foreign currency, gold or any other object as payment.

When people hear the word “money,” they often think of cash. But, in fact, most of the U.S. money supply consists of digital dollars held in bank accounts. The digital money supply is created as a byproduct of commercial bank lending operations and central bank open market operations. Digital money is converted into physical form when depositors choose to withdraw cash from their bank accounts. Most people hold both forms of money. The reasons for preferring one medium of exchange over the other are varied and familiar.

Digital dollar deposits in the banking system are widely accessible by households and businesses. This digital money flows in and out of bank accounts in the form of credits and debits whenever a party initiates a purchase. Unlike with cash, making payments with digital money has traditionally required the services of a trusted intermediary. A digital money payment is initiated when a customer sends an encrypted message instructing his or her bank to debit the customer’s account and credit the merchant’s account with an agreed-upon sum. This debit-credit operation is straightforward to execute when both customer and merchant share the same bank. The operation is a little more complicated when the customer and merchant do not share the same bank. In either case, clearing and settling payments boils down to an exercise in secure messaging and honest bookkeeping.

Cryptocurrencies, Blockchain and the Double-Spend Problem of Digital Money

One can think of cryptocurrencies as digital information transfer mechanisms. If the information being transferred is used as an everyday payment instrument, it fulfills the role of money. In this case, a cryptocurrency can be thought of as a money and payments system.

Every money and payments system relies on trust. The difference between cryptocurrencies and conventional money and payments systems lies in where this trust is located. In contrast to conventional systems, no delegated legal authority is responsible for managing and processing cryptocurrency information. Instead, the task is decentralized and left open to “volunteers” drawn from the community of users, similar in spirit to how the internet-based encyclopedia Wikipedia is managed. These volunteers—called miners—work to update and maintain a digital ledger called the blockchain. The protocols that govern the read-write privileges associated with the blockchain are enshrined in computer code. Users trust that these rules are not subject to arbitrary changes and that rule changes (if any) will not benefit some individuals at the expense of the broader community. Overall, users must trust the mathematical structure embedded in the database and the computer code that governs its maintenance.

Managing a digital ledger without a delegated accounts manager is not a trivial problem to solve. If just anyone could add entries to a public ledger, the result likely would be chaos. Malevolent actors would be able to debit an account and credit their own at will. Or they could create social credit out of thin air, without having earned it. In the context of money and payments systems, these issues are related to the so-called double-spend problem.

To illustrate the double-spend problem, consider the example of a dollar stored in a personal computer as a digital file. It is easy for a customer to transfer this digital file to a merchant on a P2P basis, say, by email. The merchant is now in possession of a digital dollar. But how can we be sure that the customer did not make a copy of the digital file before spending it? It is, in fact, a simple matter to make multiple copies of a digital file. The same digital file can then be spent twice (hence, a double-spend). The ability to make personal copies of digital money files would effectively grant each person in society his or her own money printing press. A monetary system with this property is not likely to function well.

Physical currency is not immune from the double-spend problem, but paper bills and coins can be designed in a manner to make counterfeiting sufficiently expensive. Because cash is difficult to counterfeit, it can be used more or less worry-free to facilitate P2P payments. The same is not true of digital currency, however. The conventional solution to the double-spend problem for digital money is to delegate a trusted third party (e.g., a bank) to help intermediate the transfer of value across accounts in a ledger. Bitcoin was the first money and payments system to solve the double-spend problem for digital money without the aid of a trusted intermediary. How?

The Digital Village: Communal Record-Keeping

The cryptocurrency model of communal record-keeping resembles the manner in which history has been recorded in small communities, including in networks of family and friends. It is said that there are no secrets in a small village. Each member of the community has a history of behavior, and this history is more or less known by all members of the community—either by direct observation or through communications. The history of a small community can be thought of as a virtual database living in a shared (or distributed) ledger of interconnected brains. No one person is delegated the responsibility of maintaining this database—it is a shared responsibility.

Among other things, such a database contains the contributions that individuals have made to the community. As we described above, the record of these contributions serves as a reputational history on which individuals can draw; the credit they receive from the community can be considered a form of money. There is a clear incentive to fabricate individual histories for personal gain—the ability to do so would come at the expense of the broader community in the same way counterfeiting money would. But open, shared ledgers are very difficult to alter without communal consensus. This is the basic idea behind decentralized finance, or DeFi.

Governance via Computer Code

All social interaction is subject to rules that govern behavior. Behavior in small communities is governed largely by unwritten rules or social norms. In larger communities, rules often take the form of explicit laws and regulations. At the center of the U.S. money and payments system is the Federal Reserve, which was created in 1913 through an act of Congress. The Federal Reserve Act of 1913 specifies the central bank’s mandates and policy tools. There is also a large body of legislation that governs the behavior of U.S. depository institutions. While these laws and regulations create considerable institutional inertia in money and payments, the system is not impervious to change. When there is sufficient political support—feedback from the American people—changes to the Federal Reserve Act can be made. The Humphrey-Hawkins Act of 1978 , for example, provided the Fed with three mandates: stable prices, maximum employment and moderate long-term interest rates. And the Dodd-Frank Act of 2010 imposed stricter regulations on financial firms following the financial crisis in 2007-09.

Because cryptocurrencies are money and payments systems, they too must be subject to a set of rules. In 2009, Satoshi Nakamoto brought forth his aforementioned white paper, which laid out the blueprint for Bitcoin. This blueprint was then operationalized by a set of core developers in the form of an open-source computer program governing monetary policy and payment processing protocols. Adding, removing or modifying these “laws” governing the Bitcoin money and payments system is virtually impossible. Relatively minor patches to the code to fix bugs or otherwise improve performance have been implemented. But certain key parameters, like the one that governs the cap on the supply of bitcoin, are likely impervious to change.

Concerted attempts to change the protocol either fail or result in breakaway communities called “forks” that share a common history with Bitcoin but otherwise go their separate ways. Proponents of Bitcoin laud its regulatory system for its clarity and imperviousness, especially relative to conventional governance systems in which rules are sometimes vague and subject to manipulation.

Bitcoin: Beyond the Basics

Learn about the structure and fundamentals of Bitcoin in this Timely Topics podcast with St. Louis Fed economist David Andolfatto. During the 16-minute episode , Andolfatto examines how distributed ledgers work and explains the mining process. This podcast was released Aug. 27, 2018.

How Blockchain Technology Works

As with any database management system, the centerpiece of operations is the data itself. For cryptocurrencies, this database is called the blockchain. One can loosely think of the blockchain as a ledger of money accounts, in which each account is associated with a unique address. These money accounts are like post office boxes with windows that permit anyone visiting the post office to view the money balances contained in every account. Beyond viewing the balances, one can also view the transaction histories of every monetary unit in the account (i.e., its movement from account to account over time since it was created). These windows are perfectly secured. It is important to note that many cryptocurrency users hold their funds via third parties to whom they relinquish control of their private keys. If an intermediary is hacked and burgled, one’s cryptocurrency holdings may be stolen. This has nothing to do with security flaws in the cryptocurrency itself—but with the security flaws of the intermediary. While anyone can look in, no one can access the money without the correct password. This password is created automatically when the account is opened and known only by the person who created the account (unless it is voluntarily or accidentally disclosed to others). The person’s account name is pseudonymous (unless voluntarily disclosed). These latter two properties imply that cryptocurrencies (and cryptoassets more generally) are digital bearer instruments. That is, ownership control is defined by possession (in this case, of the private password). It is worth noting that large-denomination bearer instruments are now virtually extinct. Today, bearer instruments exist primarily in the form of small-denomination bills and metal coins issued by governments. For this reason, cryptocurrencies are sometimes referred to as “digital cash.”

As with physical cash, no permission is needed to acquire and spend cryptoassets. Nor is it required to disclose any personal information when opening an account. Anyone with access to the internet can download a cryptocurrency wallet—software that is used to communicate with the system’s miners (the aforementioned volunteer accountants). The wallet software simultaneously generates a public address (the “location” of an account) and a private key (password). Once this is done, the front-end experience for consumers to initiate payment requests and manage money balances is very similar to online banking as it exists today. Of course, if a private key is lost or stolen, there is no customer service department to call and no way to recover one’s money.

Cryptocurrencies have become provocative and somewhat glamorous, but their unique and key innovation is how the database works. The management of money accounts is determined by a set of regulations (computer code) that determines who is permitted to write to the database. The protocols also specify how those who expend effort to write to the database—essentially, account managers—are to be rewarded for their efforts. Two of the most common protocols associated with this process are called proof-of-work (PoW) and proof-of-state (PoS). The technical explanation is beyond the scope of this essay. Suffice it to say that some form of gatekeeping is necessary—even if the effort is communal—to prevent garbage from being written to the database. The relevant economic question is whether these protocols, whatever they are, can process payments and manage money accounts more securely, efficiently and cheaply than conventional centralized finance systems.

Native Token

Recording money balances requires a monetary unit. This unit is sometimes referred to as the native token. From an economic perspective, a cryptocurrency’s native token looks like a foreign currency, albeit one whose monetary policy is governed by a computer algorithm rather than the policymakers of that country. Much of the excitement associated with cryptocurrencies seems to stem from the prospect of making money through capital gains via currency appreciation relative to the U.S. dollar (USD). (To see how the prices of bitcoin and ethereum, another cryptocurrency, have changed over the past decade, see the FRED charts below.) It seems to have less to do with the promise of the underlying record-keeping technology stressed by Nakamoto’s white paper. To be sure, the price of a financial security can be related to its underlying fundamentals. It is not, however, entirely clear what these fundamentals are for cryptocurrency or how they might generate continued capital gains for investors beyond the initial rapid adoption phase. Moreover, while the supply of a given cryptocurrency such as Bitcoin may be capped, the supply of close substitutes (from the perspective of investors, not users) is potentially infinite. Thus, while the total market capitalization of cryptocurrencies may continue to grow, this growth may come more from newly created cryptocurrencies and not from growth in the per-unit price of any given cryptocurrency, such as Bitcoin. See David Andolfatto and Andrew Spewak’s “ Whither the Price of Bitcoin? ” Federal Reserve Bank of St. Louis, Economic Synopses , 2019.

SOURCE: Coinbase, retrieved from FRED (Federal Reserve Economic Data).

NOTE: Gray shaded areas indicate U.S. recessions. For more data from Coinbase, see these series .

In any case, conceptually, there is a distinction to be made between the promise of a cryptocurrency’s underlying technology and the market price of its native token. Bitcoin (BTC) as a payments system could, in principle, function just as well at any given BTC/USD exchange rate.

Cryptocurrency Applications

Cryptocurrencies designed to serve as money and payments systems have continued to struggle in their quest for adoption as an everyday medium of exchange. Their main benefit to this point—at least for early adopters—has been as a long-term store of value. But their exchange rate volatility makes them highly unsuitable as domestic payment instruments, given that prices and debt contracts are denominated in units of domestic currency. While year-over-year returns can be extraordinary, it is not uncommon for a cryptocurrency to lose most of its value over a relatively short period of time. How a cryptocurrency might perform as a domestic payments system when it is also the unit of account remains to be seen. El Salvador recently adopted bitcoin as its legal tender, and people will be watching this experiment closely. Legal tender is an object that creditors cannot legally refuse as payment for debt. While deposits are claims to legal tender (they can be converted into cash on demand), they also constitute claims against all bank assets in the event of bankruptcy.

A use case touted early in Bitcoin history was its potential to serve as a vehicle currency for international remittances. One of the attractive attributes of Bitcoin is that anyone with access to the internet can access the Bitcoin payments system freely and without permission. For example, a Salvadoran working in the United States can convert his or her USD into BTC at an online exchange and send BTC to a relative in El Salvador in minutes for (usually) a relatively low fee, compared with sending money through conventional channels.

As with any tool, bitcoin may be used for good or ill purposes. Because BTC is a permissionless bearer instrument (like physical cash), it may become a popular way to finance illegal activities, terrorist organizations and money laundering operations. Recently, it has been used in ransomware attacks, in which nefarious agents blackmail hapless victims and demand payment in bitcoin, thereby bypassing the banking system.

But possibly the most attractive characteristic of Bitcoin is that it operates independently of any government or concentration of power. Bitcoin is a decentralized autonomous organization (DAO). Its laws and regulations exist as open-source computer code living on potentially millions of computers. The blockchain is beyond the (direct) reach of government interference or regulation. There is no physical location for Bitcoin. It is not a registered business. There is no CEO. Bitcoin has no (conventional) employees. The protocol produces a digital asset, the supply of which is, by design, capped at 21 million BTC. Participation is voluntary and permissionless. Large-value payments can be made across accounts quickly and cheaply. It is not too difficult to imagine how these properties can be attractive to many people.

Policy Considerations of Cryptocurrency

To a central bank, a cryptocurrency looks very much like a foreign currency. From this perspective, there is nothing revolutionary here. Foreign currency is sometimes seen as a threat by governments. This is not the case for the United States, since the U.S. dollar remains the world’s reserve currency, but many other countries often take measures to discourage the domestic use of foreign currency. Citizens may be prohibited, for example, from holding foreign currency or opening accounts in foreign banks. Because cryptocurrencies are freely available and permissionless, it would likely be considerably more difficult to enforce cryptocurrency controls. The cryptocurrency option may also serve to constrain domestic monetary and fiscal policies—in particular, by imposing a more stringent limit on the amount of seigniorage (i.e., the “printing” of more money to finance government spending).

A dominant foreign currency may cause another problem: As it turns out, it is often cheaper to issue debt denominated in a dominant foreign currency. The problem with this activity is that when the domestic currency depreciates, debtors may have trouble repaying, and a financial crisis may ensue. When that dominant foreign currency is the U.S. dollar, the central bank of a foreign country can sometimes find relief by borrowing dollars from the Federal Reserve through a currency-swap line. But if debt instruments are denominated in cryptocurrency, there is no negotiating with the DAO of that cryptocurrency. Because this is the case, domestic regulators might want to regulate the practice of issuing cryptocurrency-denominated debt more stringently, if the practice ever became sufficiently widespread to pose significant systemic risk.

Understanding Decentralized Finance

Decentralized finance broadly refers to financial activities that are based on a blockchain. Unlike conventional or traditional finance that relies on intermediaries and centralized institutions, DeFi relies on so-called smart contracts. The removal of those intermediaries in transactions between untrusted parties would significantly reduce costs and grant the parties more control over the terms of such agreements. Still, intermediaries oftentimes play meaningful roles beyond verification and enforcement, which means they would not altogether disappear. Here, we examine some of these concepts to explain what DeFi means and implies. For a more extensive review, see Fabian Schär’s “ Decentralized Finance: On Blockchain- and Smart Contract-Based Financial Markets ,” Federal Reserve Bank of St. Louis, Review , 2021; also see an analysis by Sara Feenan et al. in “ Decentralized Financial Market Infrastructures: Evolution from Intermediated Structures to Decentralized Structures for Financial Agreements ,” The Journal of FinTech , 2021.

What Are the Benefits and Challenges of Decentralized Finance?

DeFi allows parties to engage in financial transactions without the need for intermediaries. In this short video, St. Louis Fed economist Fernando Martin looks at how DeFi works with smart contracts and digital tokens.

What Are Smart Contracts?

A smart contract is a computer program designed to execute an agreed-upon set of actions. The concept was first introduced in the mid-1990s by Nick Szabo, who proposed vending machines as a primitive example: A vending machine is a mechanism that dispenses a product in exchange for a listed amount of coins (or bills); anyone with a sufficient amount of money can participate in this exchange. See Nick Szabo’s “ Smart Contracts ” (1994) and “ The Idea of Smart Contracts ” (1997). The key idea is that contractual terms, once agreed upon, are not renegotiable and are therefore automatically executed in the future. In economic theory, so-called Arrow-Debreu securities have the same property. Smart contracts allow interested parties to engage in secure financial transactions without the participation of third parties. As we explain below, their application goes beyond conventional financial transactions.

Ethereum is a blockchain with smart contract capability that was released in 2015. In this case, smart contracts are a type of account, with their own balance and the capability to interact with the network. Rather than being controlled by a user, smart contracts run as programmed, with their code and data residing at a specific address on the Ethereum blockchain. Other platforms may implement smart contracts in different ways. For example, Hyperledger allows for confidential transactions, whereas Ethereum, a public network, does not. Bitcoin is also able to handle a variety of smart contracts.

Like cryptocurrencies, smart contracts overcome security and transparency concerns in transactions between untrusted parties, without the need for a trusted third party. In fact, smart contracts aim to do away with intermediaries such as brokers, custodians and clearinghouses.

Consider a collateralized loan as an example. In traditional finance, a borrower seeks a bank to lend funds or a broker to find potential lenders. The parties then agree on the terms of the loan: interest rate, maturity, type and value of collateral, etc. The borrower’s collateral is placed in escrow. If the borrower fulfills the terms of the contract, the collateral is released and full ownership rights are returned. If the borrower defaults, the collateral is used to fulfill the contract (e.g., repay the remaining principal, interest and penalties). There are many parties involved in this transaction: financial intermediaries, appraisers, loan servicers, asset custodians, and others.

In a smart contract, the entire agreement is specified as part of the computer program and is stored on a blockchain. The program contains the terms of the loan, as well as the specific actions it will take based on compliance (e.g., the transfer of collateral ownership in the event of default). Since the blockchain handles the faithful execution of the contract, there is no need to involve any parties beyond the borrower and lender.

Asset Tokenization

The example above illustrates an important wrinkle: It may not be possible for all the elements and actions of a contract to be handled by the blockchain—particularly when it comes to collateral. If collateral is not available as an asset in the native protocol (i.e., the specific blockchain where the smart contracts exist), then, as in traditional finance, the contract necessitates a third party to provide escrow services. Naturally, this exposes the contract to counterparty risk. One solution to this problem is asset tokenization.

Asset tokenization consists of converting the ownership of an asset into digital tokens, each representing a portion of the property. If the asset exists in physical form (e.g., a house), then tokenization allows the asset to exist in a blockchain and be used for various purposes (e.g., as collateral). An important issue is how to enforce property rights stored in the blockchain for assets that exist in the physical world. This is an ongoing challenge for DeFi and one that may never be fully resolved.

Tokens also have a variety of nonfinancial applications. For example, they may grant owners voting rights to an organization. This allows for the decentralized control of institutions within a blockchain, as we describe below. Another popular application is the creation of nonfungible tokens (NFTs), which provide ownership of a digital image created and “signed” by an artist. Although the image could in principle be replicated countless times, there is only one version that is verifiably authentic. The NFT serves as a certificate of authenticity in the same way that artists’ signatures ensure paintings are originals and not copies. The advantage of an NFT is the security provided by the blockchain—signatures can be forged, whereas the authenticity of the NFT is validated by a decentralized communal consensus algorithm.

Decentralized Autonomous Organization

Smart contracts could transform the way we organize and control institutions. Applications may range from investment funds to corporations and perhaps even the provision of public goods and services.

A decentralized autonomous organization, or DAO, is an organization represented by a computer code, with rules and transactions maintained on a blockchain. Therefore, DAOs are governed by smart contracts. A popular example is MakerDAO, the issuer of the stablecoin Dai, whose stakeholders use tokens to help govern decisions over protocol changes.

The concept of governance refers to the rules that balance the interests of different stakeholders of an institution. For example, a corporation’s stakeholders may include shareholders, managers, creditors, customers, employees, the government and the general public, among others. The board of directors typically plays the critical role in corporate governance. One of the main issues corporate governance is designed to mitigate is agency problems: when managers do not act in the best interest of shareholders. But governance extends beyond regulating internal matters and may, for example, manage the role of a corporation inside a community or relative to the environment.

DAOs may be created for ongoing projects, such as a DeFi entity, or for specific and limited purposes, such as public works. Because they offer an alternative governance model by encoding rules in a smart contract, they replace the traditional top-down structure with a decentralized consensus-based model. Two prominent examples—the decentralized exchange Uniswap and the borrowing and lending platform Aave—started out in the traditional way, by having their respective development teams in charge of day-to-day operations and development decisions. They eventually issued their own tokens, which distributed governance to the wider community. With varying details, holders of governance tokens may submit development proposals and vote on them.

Centralized and Decentralized Exchanges

Currently, the most popular way in which cryptoassets are traded is through a centralized exchange (CEX), which works like a traditional bank or a broker: A client opens an account by providing personal identifiable information and depositing funds. With an account, the client can trade cryptoassets at listed prices in the exchange. The client does not own these assets, however, as the exchange acts as a custodian. Hence, clients’ trades are recorded on the exchange’s database rather than on a blockchain. Binance and Coinbase are CEXs that offer accessibility to users. However, since they stand between users and blockchains, they need to overcome the same trust and security issues as traditional intermediaries.

Decentralized exchanges (DEXs), on the other hand, rely on smart contracts to enable trading among individuals on a P2P basis, without intermediaries. Traders using DEXs keep custody of their funds and interact directly with smart contracts on a blockchain.

One way to implement a DEX is to apply the methods from traditional finance and rely on order books. These order books consist of lists of buy and sell orders for a specific security that display the amounts being offered or bid on at each price point. CEXs also work in this way. The difference with DEXs is that the list and transactions are handled by smart contracts. Order books can be “on-chain” or “off-chain,” depending on whether the entire operation is handled on the blockchain. In the case of off-chain order books, typically only the final transaction is settled on the blockchain.

Order-book DEXs may suffer from slow execution and a lack of liquidity. That is, buyers and sellers may not find adequate counterparties, and individual transactions may affect prices too much. DEX aggregators alleviate this problem by collecting the liquidity of various DEXs, which increases the depth of both sides of the market and minimizes slippage (i.e., the difference between the intended and executed price of an order).

An automated market maker (AMM) is another way to solve the liquidity problem in DEXs. Market makers are also derived from traditional finance, where they play a central role in ensuring adequate liquidity in securities markets. AMMs create liquidity pools by rewarding users who “deposit” assets in the smart contract, which then can be used for trades. When a trader proposes an exchange of two assets, the AMM provides an instant quote based on the relative availability (i.e., liquidity) of each asset. When the liquidity pools are sufficiently large, trades are easy to fulfill and slippage is minimized. Automated market makers are currently the dominant form of DEXs, because they resolve the liquidity problem better than alternative mechanisms and thus provide speedier and cheaper transactions.

What Are Stablecoins?

As we described earlier, cryptocurrencies are subject to extreme exchange rate volatility, which makes them highly unsuitable as payment instruments. A stablecoin is a cryptocurrency that ties its value to an asset outside of its control, such as the U.S. dollar. Some stablecoins stabilize their value by pegging to the U.S. dollar, backed with non-U.S. dollar assets; Dai, for example, pegs its value to a senior tranche of other cryptoassets. See Dankrad Feist’s “ On Supply and Demand for Stablecoins ,” 2021. To accomplish this, the stablecoin must effectively convince its liability holders that its liabilities can be redeemed on demand (or on short notice) for U.S. dollars at par (or at some other fixed exchange rate). The purpose of this structure is to render stablecoin liabilities more attractive as payment instruments. Pegging to the U.S. dollar is attractive to people living in the U.S. because the U.S. dollar is the unit of account. Those outside the U.S. may be attracted to the product because the U.S. dollar is the world’s reserve currency. This structure serves to increase demand for the stablecoin. But why would someone want to make U.S. dollar payments using a stablecoin instead of a regular bank account?

The answer ultimately rests on which product offers its clients the services they desire at a price they find attractive. A stablecoin is likely to be attractive at the wholesale level, where firms would be able to make USD payments at each point in an international supply chain without the need for conventional banking arrangements. Stablecoins market themselves as leveraging blockchain technology to deliver safer and more efficient account management and payment processing services. These efficiency gains can then be passed along to customers in the form of lower fees. A more cynical view ascribes these purported lower costs to regulatory arbitrage (i.e., sidestepping certain costs by relocating the transaction outside of the regulatory environment), rather than technological improvements in database management.

A Primer on Stablecoins

Stablecoins are cryptocurrencies that tie their value to an outside asset. In this short video, St. Louis Fed economist Fernando Martin takes a deep dive into stablecoins and how they have characteristics that are similar to money market mutual funds.

Financial Stability Concerns

U.S. dollar-based stablecoins are similar to money market funds that peg the price of their liabilities to the U.S. dollar. They also look very much like banks without deposit insurance . As the financial crisis of 2007-09 showed, even money market funds are subject to runs when the quality of their assets is questioned. Unless a U.S. dollar-based stablecoin is backed fully by U.S. dollar reserves (it needs an account at the Federal Reserve for this) or by U.S. dollar bills (the maximum denomination is $100, so this seems unlikely), it is potentially prone to a bank run. If a stablecoin cannot dispose of its assets at fair or normal prices, it may fail to raise the U.S. dollars it needs to meet its par redemption promise in the face of a wave of redemptions. In such an event, the stablecoin would turn out to be not so stable.

If the adverse consequences of a stablecoin run were limited to the owners of stablecoins, then standard consumer protection legislation would be sufficient. But regulators also are concerned about the possibility of systemic risk. Consider, for example, the commercial paper market, where firms regularly borrow money on a short-term basis to fund operating expenses. Then consider a stablecoin (or any money market fund) with large holdings of commercial paper. A stablecoin run in this case may compel a fire sale of commercial paper to raise the funds needed to meet the wave of redemptions. This fire sale would likely have adverse economic consequences for firms that make regular use of the commercial paper market: As commercial paper prices decline, the value of commercial paper as collateral falls, and firms may find it more difficult to borrow the funds they normally access with ease. If the fire sale spills over into other securities markets, credit conditions may tighten significantly and lead to the usual woes experienced in an economic recession (missed payments, worker layoffs, etc.). These events are sufficiently difficult for a central bank to handle when the entities involved are domestic money market funds. The problem is compounded if the stablecoin is an unregulated “offshore” DAO. Will offshore stablecoins that are “too big to fail” be able to take advantage of the implicit insurance provided by central bank lender-of-last-resort operations? If so, this would be an example of how the private benefits of DeFi arise from regulatory arbitrage and not from an inherent technological advantage. This possibility presents a significant challenge for national and international regulators.

On the other hand, it may be possible for stablecoins to be rendered “run-proof” by employing smart contracts to design more resilient financial structures. For example, real-time communal monitoring of balance sheet positions is a possibility—a feature that could shine light on what are traditionally opaque financial structures. The opacity of financial structures is not necessary to explain bank runs. For example, the canonical model of bank runs assumes the existence of transparent balance sheets. See Douglas Diamond and Philip Dybvig’s “ Bank Runs, Deposit Insurance, and Liquidity ,” The Journal of Political Economy , 1983. Furthermore, because redemption policies can potentially manifest themselves as computer code, their design can be made more elaborate (state-contingent) and credible (contractual terms that can be credibly executed and not reversed). These features can potentially render stablecoins run-proof in a manner that is not possible with conventional banking arrangements.

Regulators and Stablecoins

The regulatory concerns with stablecoins are similar to age-old concerns with the banking industry. Banks are in the business of creating money and do so by issuing deposit liabilities that promise a fixed (par) exchange rate against U.S. dollar bills and dollar credits held in Federal Reserve accounts. Lower-yielding liabilities are used to acquire higher-yielding assets. Because commercial banks normally hold only a very small fraction of their assets in the form of reserves, they are called fractional reserve banks. Since the introduction of federal deposit insurance, retail-level bank runs have been practically nonexistent. Banks also have access to the Federal Reserve’s emergency lending facilities. These privileges are matched by a set of regulatory constraints on bank balance sheets (both assets and liabilities) and other business practices.

Some stablecoin issuers would undoubtedly like to base their business models on those of banks or prime institutional money market funds. The motivation is clear: Issuing low-cost liabilities to finance high-yielding assets can be a profitable business. (Until, of course, something goes wrong. Then, regulators and policymakers face blame for permitting such structures to exist in the first place.) This business model naturally involves non-negligible risk and could make for a potentially unstable stablecoin. As stablecoins with these properties interact with off-chain financial activity, they introduce risks that may spill over to other markets and, therefore, prompt some form of regulation.

Other stablecoin issuers are likely to focus on delivering payment services, which can be accomplished by holding only safe assets. These stablecoins would be more akin to government money market funds. Stablecoins that submit to government regulations may be permitted to hold only the safest of securities (e.g., U.S. Treasury securities). If they could, they might even hold only interest-bearing reserves, thereby becoming “narrow banks.” The business model in these cases would be based on generating profits through transaction-processing fees and/or net interest margins enhanced by what stablecoin users would hope to be a wafer-thin capital requirement.

The Makeup of a Central Bank Digital Currency

The Board of Governors of the Federal Reserve System, in its recent paper “ Money and Payments: The U.S. Dollar in the Age of Digital Transformation ,” defines a central bank digital currency (CBDC) as a “digital liability of the Federal Reserve that is widely available to the general public.” This essentially means allowing the general public to open personal bank accounts at the central bank. How might a CBDC work?

Today, only financial institutions defined as depository institutions by the Federal Reserve Act and a select number of other agencies (including the federal government) are permitted to have accounts at the Federal Reserve. These accounts are called reserve accounts. The money balances that depository institutions hold in their reserve accounts are called bank reserves. The money account held by the federal government at the Federal Reserve is called the Treasury General Account. In a sense, a CBDC already exists, but only at the wholesale level and only for a small group of agencies. The question is whether to make it more broadly accessible and, if so, how.

What Is a Central Bank Digital Currency?

Economist David Andolfatto notes that there is more than one model for a central bank digital currency. In this short video, he explains how those models vary and highlights one big difference between a CBDC and traditional bank deposits: how they are insured.

As explained above, the general public already has access to a digital currency in the form of digital deposit liabilities issued by depository institutions. Most households and businesses have checking accounts with private banks. The general public also has access to a central bank liability in the form of physical currency (cash). While banks are obligated to redeem their deposit liabilities for cash on demand, deposits are not legally central bank or government liabilities. To put it another way, CBDC is (or would presumably be made) legal tender, while bank deposits represent claims to legal tender.

Federal Deposit Insurance

Bank accounts in the United States are presently insured up to $250,000 by the Federal Deposit Insurance Corp. From a political-economic point of view, bank deposits at the retail level are a de facto government liability. Moreover, given the role of the Federal Reserve as lender of last resort, one could make a case that large-value bank deposits are also a de facto government liability. To the extent this is so, the legal status of CBDC versus bank money may not be important as far as the ultimate safety of money accounts is concerned.

The Question of Counterparty Risk

Safety is only one of the many concerns surrounding money and payments. There is also the question of how counterparty risk may affect access to funds. For example, even if money in a bank account is insured, access to those funds may be delayed if a bank is suddenly subject to financial stress. This type of risk may be one reason corporate cash managers often turn to the repo market, where deposits are typically collateralized with Treasury securities that can be readily liquidated in the event deposited cash is not returned on time. If there is no restriction on the size of CBDC accounts, the product would effectively provide fully insured money accounts for corporations with no counterparty risk. Such a product, if operated effectively, could very well disintermediate (i.e., eliminate) parts of the money market.

Potential for Efficiency Gains

There is also the question of how a CBDC might improve the overall efficiency of the payments system. This is a difficult question to answer. Proponents often compare a well-designed CBDC with the payments system as it exists today in the United States, which has not caught up to developments in other jurisdictions, including in many developing economies. The U.S. payments system, however, is evolving rapidly to a point that may make CBDC a less attractive proposition. For example, The Clearing House now offers a 24/7 real-time payment services platform . The Federal Reserve’s FedNow platform will provide a similar service.

There may be no single best way to organize a payments system. A payments system is all about processing payment requests and debiting/crediting money accounts. Conceptually, bookkeeping is very simple, even if the actual implementation and operation of a payments system are immensely challenging endeavors. Any arrangement would need mechanisms that guard against fraud. Messaging must be made fast and secure. Institutions (or DAOs) must be trusted to manage the ledgers containing money accounts and related information. Property rights over data ownership would need to be specified and enforced. Some have advocated strongly for a CBDC (e.g., John Crawford et al. in “ FedAccounts: Digital Dollars ,” 2021). Others seem less enthusiastic (e.g., Larry White in “ Should the U.S. Government Create a Token-Based Digital Dollar? ” 2020; George Selgin in “ Central Bank Digital Currency as a Potential Source of Financial Instability ,” 2021; and Christopher Waller in “ CBDC: A Solution in Search of a Problem? ” 2021). In principle, a private, public or private-public arrangement could be made to work well.

What Are the Potential Benefits of a CBDC?

Payments systems have evolved over the years, and a central bank digital currency could be the next step in that evolution. In this short video, economist David Andolfatto examines how a CBDC may increase the efficiency of payments systems. He does so also within the context of The Clearing House’s 24/7 real-time payment services platform.

Like most central banks, the Federal Reserve is designed to facilitate payments at the wholesale level. It performs a vital function and overall performs it well. Traditionally, servicing the needs of a large and demanding retail sector in the United States is left to the private sector. A CBDC could be designed to respect this division of labor in one of two ways:

Permit free entry into the business of “narrow banking.” This would entail granting Fed master accounts to qualified firms with the requirement that they hold only reserves (and possibly U.S. Treasury bills) as assets. In this arrangement, digital currency remains a private liability (though fully backed by reserves).
Grant households and firms direct access to CBDC and delegate the responsibility of processing payments at the retail level to private firms. This latter arrangement is the one described in the Federal Reserve Board’s aforementioned report on CBDC. (See box below.)

Central Bank Digital Currency: Read and Comment on the Fed’s Paper

The Federal Reserve Board’s discussion paper (PDF) , released in January 2022, examines the pros and cons of a potential U.S. CBDC. While the Fed has made no decisions on whether to pursue or implement a CBDC, it has been exploring the potential benefits and risks from a variety of angles. As part of this process, the Board is seeking public feedback on whether and how a CBDC could improve an already safe and efficient U.S. domestic payments system. The comment period is open until May 20, 2022.

The ability to write history is a tremendous power. Who should be entrusted with such power? And how should privileges be restricted to ensure honesty, accuracy and (where needed) privacy?

All sorts of individual and group histories play an important role in coordinating economic activity, including credit histories, work histories, performance histories, educational attainment histories and regulatory compliance histories. In this report, we have focused primarily on payment histories in the context of cryptocurrency—including the fact that histories can be fabricated, and that individuals and organizations may be tempted to misrepresent their own histories for private gain at the expense of the broader community. Even relatively well-functioning societies must devote considerable resources to reconciling conflicting claims of past behavior, given the absence of reliable databases that contain those histories. The U.S. Chamber of Commerce Institute for Legal Reform found the cost of litigation in the United States amounted to $429 billion, or 2.3% of U.S. gross domestic product, in 2016. Over 40% of this cost was used to pay legal, insurance and administrative costs. These costs constitute a lower bound, as most disputes are reconciled outside the legal system.

Much of our everyday economic activity occurs outside any formal record-keeping, and societies have relied on informal communal record-keeping to incentivize individual and organizational behavior. Paper and electronic receipts issued for most commercial exchanges are more formal but are often incomplete and easily fabricated. More important records—for physical property, bank accounts, financial assets, licenses, certificates of education, etc.—are managed by trusted authorities.

These traditional forms of record-keeping are likely to be challenged by blockchain technology, which provides a very different model of information management and communication. Competitive pressures compel organizations and institutional arrangements to evolve in response to technological advances in data storage and communications. Consider, for example, how the telegraph, telephone, computer and internet have transformed the way people interact and organize themselves. Advances in blockchain technology are likely to generate even more dramatic changes, though what these may be remains highly uncertain.

For an accessible introduction to the technology, see Fabian Schär and Aleksander Berentsen’s “ Bitcoin, Blockchain, and Cryptoassets: A Comprehensive Introduction ,” MIT Press, 2020.
See Narayana Kocherlakota’s “ The Technological Role of Fiat Money ,” Federal Reserve Bank of Minneapolis, Quarterly Review , 1998.
Relatively minor patches to the code to fix bugs or otherwise improve performance have been implemented. But certain key parameters, like the one that governs the cap on the supply of bitcoin, are likely impervious to change.
Beyond viewing the balances, one can also view the transaction histories of every monetary unit in the account (i.e., its movement from account to account over time since it was created).
It is important to note that many cryptocurrency users hold their funds via third parties to whom they relinquish control of their private keys. If an intermediary is hacked and burgled, one’s cryptocurrency holdings may be stolen. This has nothing to do with security flaws in the cryptocurrency itself—but with the security flaws of the intermediary.
See David Andolfatto and Andrew Spewak’s “ Whither the Price of Bitcoin? ” Federal Reserve Bank of St. Louis, Economic Synopses , 2019.
Legal tender is an object that creditors cannot legally refuse as payment for debt. While deposits are claims to legal tender (they can be converted into cash on demand), they also constitute claims against all bank assets in the event of bankruptcy.
For a more extensive review, see Fabian Schär’s “ Decentralized Finance: On Blockchain- and Smart Contract-Based Financial Markets ,” Federal Reserve Bank of St. Louis, Review , 2021; also see an analysis by Sara Feenan et al. in “ Decentralized Financial Market Infrastructures: Evolution from Intermediated Structures to Decentralized Structures for Financial Agreements ,” The Journal of FinTech , 2021.
See Nick Szabo’s “ Smart Contracts ” (1994) and “ The Idea of Smart Contracts ” (1997). The key idea is that contractual terms, once agreed upon, are not renegotiable and are therefore automatically executed in the future. In economic theory, so-called Arrow-Debreu securities have the same property.
For example, Hyperledger allows for confidential transactions, whereas Ethereum, a public network, does not. Bitcoin is also able to handle a variety of smart contracts.
Some stablecoins stabilize their value by pegging to the U.S. dollar, backed with non-U.S. dollar assets; Dai, for example, pegs its value to a senior tranche of other cryptoassets. See Dankrad Feist’s “ On Supply and Demand for Stablecoins ,” 2021.
The opacity of financial structures is not necessary to explain bank runs. For example, the canonical model of bank runs assumes the existence of transparent balance sheets. See Douglas Diamond and Philip Dybvig’s “ Bank Runs, Deposit Insurance, and Liquidity ,” The Journal of Political Economy , 1983.
The U.S. Chamber of Commerce Institute for Legal Reform found the cost of litigation in the United States amounted to $429 billion, or 2.3% of U.S. gross domestic product, in 2016. Over 40% of this cost was used to pay legal, insurance and administrative costs. These costs constitute a lower bound, as most disputes are reconciled outside the legal system.

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Essay on Money for Students and Children

500+ words essay on money.

Money is an essential need to survive in the world. In today’s world, almost everything is possible with money. Moreover, you can fulfill any of your dreams by spending money. As a result, people work hard to earn it. Our parents work hard to fulfill our dreams .

Furthermore various businessmen , entrepreneurs have startup businesses to earn profits. They have made use of their skills and intelligence in getting an upper hand in earning. Also, the employee sector works day and night to complete their tasks given to them. But still, there are many people who take shortcuts to success and get involved in corruption.

Black Money

Black money is the money that people earn with corruption . For your information corruption involves the misuse of the power of high posts. For instance, it involves taking bribes, extra money for free services, etc. Corruption is the main cause of the lack of proper growth of the country .

Moreover, money that people having authority earns misusing their powers is black money. Furthermore, these earnings do not have proper documentation. As a result, the people who earn this do not pay income tax . Which is a great offense and the person who does this can be behind bars.

Money Laundering

In simple terms, money laundering is converting black money into white money. Also, this is another illegal offense. Furthermore, money laundering also encourages various crimes. Because it is the only way criminal can use their money from illegal sources. Money laundering is a crime, and the people who practice it are liable to go to jail.

Therefore the Government is taking various preventive measures to abolish money laundering. The government is linking bank accounts to AADHAR Card. To get all the transaction detail of each bank account. As a result, the government comes to know if any transaction is from an illegal source .

Also, every bank account has its own KYC (Know your Customer) this separates different categories of income of people. Businessmen are in the high-risk category. Then comes the people who are on a high post they are in the medium-risk category. Further, the last category is of the Employee sector they are at the lowest risk.

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White Money

White money is the money that people earn through legal sources. Moreover, it is the money on which the people have already paid the tax. The employee sector of any company always has white money income.

Because the tax is already levied on their income. Therefore the safest way to earn money is in the employment sector. But your income will be limited here. As a result, many people take a different path and choose entrepreneurship. This helps them in starting their own company and make profitable incomes .

Every person in this world works hard to earn money. People try different methods and set of skills to increase their incomes. But it is always not about earning money, it’s about saving and spending it. People should spend money wisely. Moreover, things should always be bought by judging their worth. Because money is not precious but the efforts you make for it are.

Q1. What is Black Money?

A1. Black money is the money that people earn through illegal ways. It is strictly prohibited in our country. And the people who have it can go to jail.

Q2. What is the difference between Black money and White money?

A2. The difference between black money and white money is, Black money comes from illegal earnings. But white money comes from legal sources with taxation levied on it.

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Cryptocurrency
Words: 1097

Paper Money and Digital Currency

Currently, we the people, use paper money and digital currency. Some people use only one or the other. Regardless of which side they are on, the two excites in society today. They both are used daily. The question is, will digital currency be a reliable replacement for paper money? I do not believe digital currency is a reliable replacement for paper money.

The digital currency could be many things, in many ways. It is not just credit cards or debit cards only. There can be so many others, such as, token points for a certain app, that uses it, that can be transformed into digital money. Digital currency is very flexible. As for paper money for some people it is a hassle because some may not have any physical money on them, so they may have to go all the way to the bank wait in a long line just to get some cash out from their bank. With digital currency however, there can be much more fraud on the persons account. More people (hackers) stealing from others through technology. According to Janda, Michael. “Aside from these inherent contradictions, the BIS also warns that cryptocurrencies remain more vulnerable to fraud and even potential debasement than currencies managed by responsible central banks. as with any part of the financial sector, the cryptocurrency space is frequently the target of outright fraud. This is particularly the case with initial coin offerings (ICOs), where investors put conventional money into the launch of new cryptocurrencies.” Even people that are minors may even be able to have computers as their power of way to steal digital currency from others.

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There is also more value into paper money compared to tokens that can be transformed into digital currency. When asked to the public if digital currency will replace paper money, even the people that love the token, cryptocurrencies, and digital currency, say that it is unrealistic and that it should not happen anytime soon. According to LaPonsie, Maryalene. “When asked if cash will disappear anytime soon, even fans of cryptocurrencies and cashless systems say that’s not likely. ‘No, that’s not realistic for the next 50 years,’ Drake says. While he remains confident in the viability of cryptocurrencies, ‘It will never replace cash in this century,’ he says.” Many people also believe that there will be issues with the government if we go into paperless money. And that it will affect the government and the feds. In the same article of LaPonsie, Maryalene she sates “If and when consumers embrace cryptocurrencies, Nigro predicts the government will get involved. ‘I think eventually we’ll see some sort of digital currency issued by the federal government,’ he says.” For digital currency there can also be issues with the storage, there needs to be stored and transmitted information to be checked and millions of transactions a day, for many people storage on phones and computers may come to be unreliable as sometimes the memory card that is put in them may become destroyed or damaged.

“The second problem is the amount of data that needs to be both stored and transmitted to verify the blockchains in distributed ledger handling millions of transactions a day. “With every transaction adding a few hundred bytes, the ledger grows substantially over time. For example, at the time of writing, the bitcoin blockchain was growing at around 50 GB per year and stood at roughly 170 GB,” the report noted. To handle the volume of transactions that go through major global payment networks like Visa, Mastercard or PayPal, you would quickly need banks of servers to store the data. But the problem worsens when you consider that this information must be shared each time a new transaction has to be added to the chain.” (Janda, Michael) Many Federal Reserve’s disagree that digital currency will replace paper money. According to Shen, Lucinda, she states that New York federal reserves Williams, John laid a case on why cryptocurrencies, or any sort of digital currency cannot replace paper money. “the current San Francisco Fed President John Williams laid out a case for why cryptocurrencies, the most prominent of which is Bitcoin, cannot replace paper money. Like others who question Bitcoin’s usefulness as a currency, Williams noted that cryptocurrencies are volatile, making it difficult to pay the correct price for an item. Secondly, while the world’s central banks try to stabilize the economy at times by either increasing or decreasing the amount of cash circulating, Bitcoin has a fixed supply: 20 million. “Cryptocurrency doesn’t pass the basic test of what a currency should be,” he said, as reported by CNBC.”

Which makes sense on why digital currency would be hard to replace paper money. I understand both sides. There are always pros and cons to each side. If digital currency were to replace paper money. There just would be many problems. It cannot be a reliable replacement. The way it is in society today, is what I think is the best way. Because you can choose which side you want to use, and it is open to many options. Out of the two sides, with digital currency replacing paper money would have the most cons. Compared of it not replacing paper money. If digital currency does replace paper money, there will indeed be many issues with this. It is not a reliable replacement for paper money. The way it is now is good. How people have the option to go with paper money for digital currency, their choice. IF just one is chosen, either to have digital or paper only then there would be a lot of conflict between people. Plus, not to mention the government having issues as well with digital currency. That alone is a major and high purpose on why it is not a reliable replacement of paper money.

In conclusion, nothing is a real good reliable replacement for paper money. Paper money has been around for more than 500 years. The best idea is to keep the way it is today, where people have the choice to choose whether they want to use cash or digital currency.

Janda, Michael. “Cryptocurrencies like bitcoin cannot replace money, says Bank for International Settlements.” ABD News, 18 Jun 2018, https://www.abc.net.au/news/2018-06-18/cryptocurrencies-cannot-replace-money-bis/9879448.
LaPonise, Maryalene. “Will We Say Goodbye to Cash in 2018?” U.S. News & World Report, 4 Jan 2018, https://money.usnews.com/money/personal-finance/banking-and-credit/articles/2018-01-04/will-we-say-goodbye-to-cash-in-2018.
Shen, Lucinda. “Cryptocurrencies Like Bitcoin Can’t Replace the Dollar, Says New York Fed Chief Nominee.” Fortune, 21 April 2018, http://fortune.com/2018/04/20/bitcoin-new-york-fed-central-bank-jack-dorsey/.

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Essay Samples on Currency

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Best topics on Currency

1. Transitioning to a Cashless Economy: Challenges, Opportunities, and the Path Ahead

2. Getting Rid Of The Penny Because Of Its Negative Effects

3. Effects of Euro Integration and Political Reasons Why Euro Currency Shouldn’t Survive

4. The History of Fintech Development

5. Financial Technology: Convenience of Financial Stability of Today

6. FinTech – The Next Evolution in Finance

7. The Impact Euro Debt Crisis on EU Countries

8. The current state of euro in global market

9. The Impact of the Euro on the Global Economy

10. Mining Industry and the Importance of Geology

11. What is Digital Gold and How It Wad Created

12. History of Gold and Digital Gold

13. The Longevity of Bitcoin’s Usage and Its Future

14. Fallacies and Conventional Wisdoms about Bitcoin and Cryptocurrency

15. Bitcoin and Cryptocurrency as a New Innovation in Economical Field

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Currency Questions, Essay Example

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In this brief paper I will try to answer some basic questions about the nature of currency systems. The most basic one seems to be: how many currencies should there be? English philosopher John Stuart Mill believed there should be one, or at least fewer than many: So much of barbarism, however, still remains in the transactions of most civilised nations, that almost all independent countries choose to assert their nationality by having, to their own inconvenience and that of their neighbours, a peculiar currency of their own. On this point I begin.

How many currencies there should be depends on your view of what a currency is. For most of modern history, the money that people have used represented a nation. The Euro , introduced as the currency of the European Union in 1999, is something entirely new in that it officially represents (as of now, anyway) 17 nations. It defines an optimal currency area (OCA), a politically determined region thought by some to be best economically served by a single currency . But whether nation or union, all currencies represent a political entity and are under the control of that entity through a central bank. Advocates of such currencies (some of whom back a single world currency) believe that OCAs greatly increase economic efficiency. Within the OCA, multinationals don’t have to worry about falling and rising currency values in customer nations, and tourists need no moneychangers. A great boon that seems self-evident to anyone.

But not so fast. Nations and currency unions can’t themselves generate capital, being just arbitrarily-bordered political conceptions, cutting across ethnic, geographic, or political forces as if they didn’t exist. Capital is generated only in mutually trading cities that each replace their own imports with their own production in order to import or export something new, adding people, goods, and territory explosively. Since antiquity many cities were city- states and had their own currencies. Singapore and Hong Kong still do. National or Union currencies, especially of large areas, are handicapped because they can register their changing values only in terms of international trade. For example, if Russia discovered more oil within its borders, its ruble would rise in value because more people would want to buy that oil. But in the event of a recession, a hot winter, or a new Japanese electric-car battery, the ruble will fall because fewer people will need it. That changing value changes prices. Economists call this information feedback . But a national or OCA currency creates no feedback within its own borders. For example, in the U.S., there is no feedback-loop measuring fluctuations of trade between, say, Detroit and Pittsburgh, which may explain why those cities lost their markets. Western nations like the U.S. and Canada have far more domestic trade than international trade. Yet there is no feedback controlling it. So a “strong” U.S. dollar can and does price domestic manufacturers out of their world markets. They either go bust or move to another country with a “weaker” currency. Like China.

China (with its own lack of internal feedback) has kept its currency competitively weak by design. This keeps its products cheap on the international markets and centers its economy on exports. This can be termed strategic devaluation, as opposed to a tactical devaluation, which is what the Euro’s PIGS’ (Portugal, Ireland, Greece, Spain) would dearly love to do, but can’t.

The current Euro crises was caused because the Euro has the same value, regardless of where it is borrowed or how it is spent. After 1999, the PIGS (and France), who previously would have been considered relatively poor credit-risks and made to pay a higher rate of interest in their own money, ended up with the same credit rating as the disciplined Germans. As a result, the debtors partied like it was still 1999. Now the hangover. But because of the single Euro, they cannot devalue their currencies like they used to do, allowing their nations’ products to be cheaper for each other’s buyers, letting their exports lead the way out of crushing debt. They are stuck, and faced with loan-shark bailout conditions from the European Central Bank, or the chaotic consequences of ditching the Euro. So we can say that the Euro crisis is caused by not enough currencies, rather than too many. So there is actually an argument for city currencies.

The original medium of exchange was gold. Other currencies varied in value in comparison to it. In antiquity, everyone was on the gold standard by default — there was no other universally accepted money. Later, with the introduction of paper money, things got more complicated. The U.S. was on a gold standard for much of its history, except in times of war, which was so expensive that paper money was mandated and then inflated until worthless. During peacetime, citizens could go to a bank and demand gold for dollars or vice versa, but the price of gold depends on its physical supply, like any commodity. It can impose discipline too, and after Roosevelt (1932), elected leaders who failed to evade such discipline risked their jobs. When the 1944 Bretton Wood agreement replaced gold with the dollar as the international currency, its price in gold and other currencies was fixed ( pegged) by political fiat. By the 1970s, American inflation, fed by the Vietnam War and the Great Society, had destroyed those rates. The market set them thereafter, and in an ongoing quest for national discipline, dollarization is sometimes tried: a stagnant or developing nation, recognizing its political inability to manage its own currency, quits it or shares it with another, like border towns do. A nation using U.S. dollars trades at whatever exchange rate the U.S is earning, so a small export-economy could be ruined. (Think of a mouse hooked to an elephant’s lungs.) Tourism must then replace that lost money. Other stratagems include linked exchange rates , which tethers one currency to another to limit fluctuations; and managed floats , also known as dirty floats , in which a central bank intervenes in a floating currency only when deemed essential. All such arrangements can work only to the extent that they are not severely tested by money markets sensing an overvalued currency.

In a world of fiat money, fiscal discipline is rarer than gold. Bitcoin , anyone?

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Trump plans to take Arizona's 'show me your papers' immigration law nationwide

Opinion: trump told time magazine that his plan for the largest deportation operation ever in the united states includes using the national guard, the military and local police..

The folks in Fountain Hills who are horrified at the possibility of former Maricopa County Sheriff Joe Arpaio being elected mayor in November may have nothing to worry about.

The next Donald Trump administration — should there be one — could have a high-profile job for the 91-year-old ex-lawman who was convicted of criminal contempt of court then pardoned by Trump in 2017.

Time Magazine published an interview with Trump this week in which he said that as part of his plan to resurrect the grotesque Eisenhower-era “Operation Wetback,” the largest mass deportation of undocumented workers in United States history, he would use local police to help round up and deport those suspected of being in the country illegally.

Trump told Time that he’d use the National Guard and the military, and added, “ We’re going to be using local police , because local police know them by name, by first name, second name and third name. I mean, they know them very well.”

Arpaio's immigration sweeps cost Arizona

Arizona has already tried that. We have the scars to prove it by way of the state’s infamous Senate Bill 1070 “show me your papers” law.

After that atrocity of a bill passed the Legislature and was signed by then-Gov. Jan Brewer, Arpaio used deputies to run immigration sweeps and traffic stops that eventually led to lawsuits that have, so far, cost Maricopa County taxpayers $250 million.

Courts found the policies and practices of Arpaio’s office to violate the Fourth and Fourteenth Amendments , as well as Title VI of the Civil Rights Act of 1964.

Kari Lake is: Arizona’s new Joe Arpaio

Not that it stopped Arpaio from continuing the raids in violation of a court order. Which led to his criminal contempt conviction. Which led to the Trump pardon.

And which could lead — Hey, why not? — to a BIG role in the next Trump administration.

Trump would 'convince' local police to go along

Deportation Czar, or something like that, a job that would require someone like Arpaio, someone familiar with public policy based on ignoring the law.

Trump is a guy like that . In the Time interview, for example, Trump brushed off the fact that it is illegal to use military force on civilians.

“Well, these aren’t civilians,” Trump said. “They are people that aren’t legally in our country.”

And when he was reminded that a president has no authority over local law enforcement, Trump hinted that he’d encourage cooperation by way of the pocketbook.

“There’s a possibility that some won’t want to participate,” Trump said, “and they won’t partake in the riches.”

Put all that together and it occurs to me that Arpaio’s future position, should he be offered one, could not have the word “czar” in its title.

Trump will already have taken that.

Reach Montini at [email protected] .

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106 Cryptocurrency Essay Topic Ideas & Examples

🏆 best cryptocurrency topic ideas & essay examples, 🎓 good research topics about cryptocurrency, ⭐ simple & easy cryptocurrency essay titles, ❓ cryptocurrency research questions.

Ethical Implications of the Use of Bitcoin The emergence of cryptocurrency has been a significant breakthrough for global economic policy and practice, and Bitcoin is expected to continue to evolve. In particular, increased states are recognizing Bitcoin and creating legal regulations for […]
Money Laundering Through Cryptocurrencies This study will try to critique the approaches used by countries to address the aspect of money laundering activities and the risks posed by digital currencies. We will write a custom essay specifically for you by our professional experts 808 writers online Learn More
Aspects of Bitcoin Transaction Threats Thus, it is imperative that the wallets are encrypted and have an offline backup to ensure the information can be accessed even after a DDoS attack. This can be addressed by improving the Bitcoin protocols […]
Aspects of Bitcoin and Cryptocurrency Bitcoin is a digital currency that is much different from any other past form of money that has existed in the past.
Cryptocurrency and Its Impact on the Banking Industry Advanced coding is used to store and transfer cryptocurrency data between the wallet and a public ledger, and encryption is used to confirm transactions.
Diffusion of Innovation as Exemplified by Bitcoin This paper will give an example of a company officially registered as “Satoshi Nakamoto,” which created and implemented one of the first and most popular cryptocurrencies – Bitcoin.
Bitcoin: Advantages and Disadvantages The law of supply and demand applies to the cryptocurrency sector since it relies on the rate of interest charged in the market.
Cryptocurrency Adoption in Africa A cryptocurrency is a type of virtual money that employs encryption to authenticate the ownership of a unit of financial value.
Cryptocurrency Crimes in Financial Markets One of the most relevant, and important news in recent times is the trend of cryptocurrency crimes in financial markets. In this case, it is necessary to improve security systems concerning the management, control, storage, […]
Bitcoin Technology: Ethical Considerations and Summing Up Moral principles that govern a person’s behavior or the conduct of an activity Standards of right and wrong that exist in society and guide the individual in terms of rights and responsibilities, justice, virtue, […]
The Cryptocurrency Concept Analysis The basis of cryptocurrency operations is essential codes that allow the private exchange of business. The anonymity of banks and other government organizations poses a big threat to the operation of cryptocurrencies.
Bitcoin: The Key Characteristics In theory, this should increase the cybersecurity of the use of such money, and this presentation will detail the characteristics of Bitcoin as one of the most important cryptocurrencies of our time.
Analysis of Solana Cryptocurrency An investment in Solana is a safer choice among cryptocurrencies, yet it has the potential to multiply one’s savings. Solana has the potential to overcome these barriers and turn into a globally accepted currency.
Bonds and Stocks vs. Cryptocurrency Volkswagen stock is in that category as the stock witnessed a gain of seven percent over the last year. Despite all the popularity of the idea that crypto is a great asset, buying one is […]
Cryptocurrency and Its Instability Issues The purpose of this paper is to examine the nature of cryptocurrency, its characteristics, and impact on the basis of literature review to answer the research question: Is cryptocurrency unstable? It cannot be double-spent or […]
“Cryptocurrency and the Problem of Intermediation” by Harwick The article titled “Cryptocurrency and the problem of intermediation” discusses the vital point of crypto development. The purpose of this paper is to identify the objectives, approach, methodology, and other details described in the given […]
Power, Property, and Freedom: Bitcoin Discourse In the modern world, all people have the right to freedom and property, but not all have the power to decide who may have this freedom and property.
Cryptocurrency and Its Taxation in Australia Today, the financial systems of separate states and other aspects of the economy are improving and progressing in the context of globalization, the spread of IT technologies, and general computerization.
Precious Metal and Cryptocurrency: Demand Forecasting Modern demand forecasting technologies help to minimize working expenses and achieve maximum value from capital investments.
PayPal’s Big Bitcoin News PayPal is one of the latest financial companies to embrace Bitcoin as a currency in its services, a step that has potential benefits to the institution and its clients.
Blockchain and Bitcoin Technology The literature review presented below describes the possible future trends of blockchain and bitcoin technology, future trends of its application, and the potential implementation in the United Arab Emirates private and government sectors.
Cryptocurrency Exchange Market Prediction and Analysis Using Data Mining and Artificial Intelligence This paper aims to review the application of A.I.in the context of blockchain finance by examining scholarly articles to determine whether the A.I.algorithm can be used to analyze this financial market.
Bitcoin Issues in Accounting Information System This paper addresses one of the issues related to the use of Bitcoin in terms of accounting information systems. On balance, it is necessary to observe that the increasing use of Bitcoin calls for changes […]
Rise of Cryptocurrency The increased importance of cryptocurrency peculiar to the recent several years contributed to significant attention devoted to the investigation of this potentially beneficial means of payment.
Factors Impacting Cryptocurrencies’ Adoption The high speed of the world’s transformation under the impact of innovations was increased by the emergence of the Internet, and it is becoming a potent tool in managing various activities.
Cryptocurrencies and Financial Technology The development of the first cryptocurrency, Bitcoin, launched in 2009, led to the creation of a new sector in the field of economy called financial technology.
Bitcoin and Ripple in the Next 50 Years Many countries such as India, Indonesia, and Japan among others have endorsed the use of Bitcoin and Ripple, despite the lack of clear policies on the operations and sustainability of such new digital currencies.
Cryptocurrencies and Their Regulation Features The introduction of cryptocurrencies into the global financial system has led to the growth of a new sector of finance known as FinTech.
Bitcoin Digital Currency Usage It is the central player in the market of the digital currencies and can be considered as one of the concepts that have an impact on the development of the modern e-commerce.
Bitcoin Digital Currency: Advantages and Disadvantages According to Bouoiyour and Selmi, the absence of intermediaries in bitcoin transactions and the involvement of parties to a business is a milestone that amplifies its position in the currency platform.
Cryptocurrency Technologies: Communication Theories Therefore, the concept of buying and reselling the cryptocurrency implies following the communication privacy management theory, as well as the uncertainty reduction theory, which is caused by the natural desire of the majority of the […]
Online Payment Opportunities: PayPal and Bitcoin However, it is necessary to understand that online operations have a number of peculiarities and obligations, and one of them is the necessity to choose a proper payment method.
Cryptocurrency Schemes Creating Artificial Bubbles The introduction of cryptocurrencies in the recent past is one of the outcomes of innovation in the money market. The growth of cryptocurrencies has influenced the development of new business opportunities that have contributed to […]
Bitcoin and US-China Trade Relationship The fact is that the high pace of development of various ventures and a number of rivals has resulted in the perception of the need for a search for new markets and ways to realize […]
Bitcoin: Economics, Technology, and Governance The scarcity of paper money is caused and ensured by unequal access to technology, and the scarcity of book money, in its turn, is regulated by legal rules. What is the full title of the […]
The Economic Impact of Adopting Bitcoin as an Alternative for Goods and Services The creation of Bitcoin is known as a mining activity because computers work constantly to solve the mathematical problems, and the result is the presentation of encrypted keys that are used as coins.
Volatility Spillovers Among the Cryptocurrency Time Series
High-Frequency Volatility Co-movements in Cryptocurrency Markets
Cryptocurrency Framework Diagnostics From Islamic Finance Perspective: A New Insight of Bitcoin System Transaction
Bitcoin the Cryptocurrency: Stimulating Global Economic Growth
Flexible Majority Rules for Cryptocurrency Issuance
Cryptocurrency: Era and Field of Financial Innovations
Investment Behaviors in Cryptocurrency
Ban Ads for Cryptocurrencies, Cryptocurrency Products, and Initial Coin Offerings
Diversification, Integration, and Cryptocurrency Market
The Adaptive Market Hypothesis in the High-Frequency Cryptocurrency Market
Cryptocurrency, Artificial Intelligence and Basic Income as Innovative Technological System
Momentum and Contrarian Effects on the Cryptocurrency Market
Information Demand and Cryptocurrency Market Activity
Cryptocurrency Advantages and Disadvantages
Variables Influencing Cryptocurrency Use: A Technology Acceptance Model
Ransomware Cryptocurrency and Computer Security
Blockchain Cryptocurrency Backed With Full Faith and Credit
Navigating the Cryptocurrency Landscape: An Islamic Perspective
Analyzing Social Media Forums to Discover Potential Causes of Phasic Shifts in Cryptocurrency Price Series
Information Interdependence Among Energy, Cryptocurrency, and Significant Commodity Markets
Price Delay and Market Frictions in Cryptocurrency Markets
Cryptocurrency and the Current Challenges Facing the Market
Blockchain Applications and Innovations in the Field of Cybersecurity Using Cryptocurrency
Cryptocurrency Market Contagion: Market Uncertainty, Complexity, and Dynamic Portfolios
Anticipating Cryptocurrency Prices Using Machine Learning
Blockchain Structure and Cryptocurrency Prices
Long- And Short-Term Cryptocurrency Volatility Components
Factors Influencing Cryptocurrency Prices: Evidence From Bitcoin, Ethereum, Dash, Litcoin, and Monero
Cryptocurrency Traders: Pioneers or Risk-Seekers
Cryptocurrency Market Structure: Connecting Emotions and Economics
Bitcoin and Other Cryptocurrencies as an Instrument of Crime in Cyberspace
Multivariate Stable Distributions and Their Applications for Modeling Cryptocurrency-Returns
The History, Ethics, Advantages, and Disadvantages of Bitcoin and Others Cryptocurrencies
Deep Convolutional Autoencoder for Cryptocurrency Market Analysis
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Harvard’s Taylor Swift Scholars Have Thoughts on ‘Tortured Poets’

The students taking Harvard University’s class on the singer are studying up. Their final papers are due at the end of the month.

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An insignia carved into stone on a brick archway outside that reads “Veritas.”

By Madison Malone Kircher

Fans of Taylor Swift often study up for a new album, revisiting the singer’s older works to prepare to analyze lyrics and song titles for secret messages and meanings .

“The Tortured Poets Department” is getting much the same treatment, and perhaps no group of listeners was better prepared than the students at Harvard University currently studying Ms. Swift’s works in an English class devoted entirely to the artist . The undergraduate course, “Taylor Swift and Her World,” is taught by Stephanie Burt, who has her students comparing Ms. Swift’s songs to works by poets and writers including Willa Cather, Samuel Taylor Coleridge and William Wordsworth.

On Thursday night, about 50 students from the class gathered in a lecture hall on campus to listen to Ms. Swift’s new album. Mary Pankowski, a 22-year-old senior studying history of art and architecture, wore a cream sweatshirt she bought at Ms. Swift’s Eras tour last year. The group made beaded friendship bracelets to celebrate the new album, she said.

When the clock struck midnight, the classroom erupted into applause, and the analysis began. First, the group listened through the album once without discussing, just taking it all in.

Certain lines, however, immediately caused a stir, said Samantha Wilhoit, a junior studying government — like a reference to the singer Charlie Puth and the scathing lyrics to the song “The Smallest Man Who Ever Lived,” Ms. Wilhoit, 21, said.

A line from the song “I Can Do It With a Broken Heart,” in which Ms. Swift sings, “I cry a lot but I am so productive,” also seemed to resonate, Ms. Wilhoit said, laughing.

A smaller group of students, including Ms. Pankowski, stuck it out until the early hours of the morning waiting to see if Ms. Swift would drop additional music. At 2 a.m., they were rewarded with an additional “volume” of 15 tracks called “The Anthology.” Ms. Pankowski said she didn’t go to sleep until hours later.

Speaking with The New York Times together on a video call Friday morning, several students from the class discussed their thoughts on the 31 new songs and brainstormed their final papers, which are due at the end of the month.

“The song ‘Clara Bow’ reminded me of ‘The Song of the Lark,’” Makenna Walko, 19, said, citing the Willa Cather novel that follows the career of an aspiring opera singer, Thea Kronborg. “She’s talking about a girl trying to make it out of her small town and trying to get to Manhattan, and what it’s like to have these big, musical dreams and try to pursue them,” she continued. “That’s a narrative that has shown up a lot in Taylor’s own life, over the course of her own career. In a lot of ways, it’s Taylor’s story, too.”

Lola DeAscentiis, a sophomore, zeroed in on the song “But Daddy I Love Him,” comparing it to the Sylvia Plath poem “Daddy.” She plans to explore the link in her final paper.

“I hesitate to say that the song was anywhere near the genius of Sylvia Plath — no offense to Taylor Swift — but I can definitely see some similarities in the themes, like sadness, depression and mental health,” Ms. DeAscentiis, 20, said. (Ms. DeAscentiis also drew a distinction between being a fan of Ms. Swift and being a devoted Swiftie. She said she identified as the former.)

“The way that Taylor overlays her relationship with the significant other that she’s talking about in the song with the relationship that she has with her father — I think that was very Plath,” she added.

Another student, Ana Paulina Serrano, echoed Ms. DeAscentiis, noting that the class had learned about the genre of confessional poetry. “Is Taylor considered a confessional poet?” Ms. Serrano, a 21-year-old junior majoring in neuroscience, asked the group on the call. In support of her own position, she offered as evidence Ms. Swift’s song “Mastermind,” a track off “Midnights,” in which Ms. Swift reveals herself to have calculated and plotted the outcome of a relationship.

“Sometimes she’s confessing things that we, like, already knew or assumed, but she often seems to feel this need to explicitly tell us,” Ms. Serrano added.

Isabel Levin, a 23-year-old senior studying integrative biology, said she thought Ms. Swift’s delivery on several tracks had a spoken-word quality. She wondered if maybe some of the lyrics had initially begun not as songs but as more traditional poems.

Ms. Swift has said she categorizes her songs by the type of pen she imagines using to write each. A “frivolous, carefree, bouncy” song is a glitter gel pen song, while a fountain pen song might be more “brutally honest,” according to Ms. Swift . Quill pen songs are “all old-fashioned, like you’re a 19th-century poet crafting your next sonnet by candlelight,” she explained during her acceptance speech as songwriter-artist of the decade at the Nashville Songwriter Awards in 2022.

And with what implement might Ms. Swift have written “Tortured Poets?”

Quill pen, for sure, Ms. Walko said.

Madison Malone Kircher is a Times reporter covering internet culture. More about Madison Malone Kircher

Inside the World of Taylor Swift

A Triumph at the Grammys: Taylor Swift made history by winning her fourth album of the year at the 2024 edition of the awards, an event that saw women take many of the top awards .

‘The T ortured Poets Department’: Poets reacted to Swift’s new album name , weighing in on the pertinent question: What do the tortured poets think ?

In the Public Eye: The budding romance between Swift and the football player Travis Kelce created a monocultural vortex that reached its apex at the Super Bowl in Las Vegas. Ahead of kickoff, we revisited some key moments in their relationship .

Politics (Taylor’s Version): After months of anticipation, Swift made her first foray into the 2024 election for Super Tuesday with a bipartisan message on Instagram . The singer, who some believe has enough influence to affect the result of the election , has yet to endorse a presidential candidate.

Conspiracy Theories: In recent months, conspiracy theories about Swift and her relationship with Kelce have proliferated , largely driven by supporters of former President Donald Trump . The pop star's fans are shaking them off .

Technology | Mercury News and other papers sue Microsoft,…

Technology | Mercury News and other papers sue Microsoft, OpenAI over the new artificial intelligence

Tech giants have called central claim ‘pure fiction’.

WASHINGTON, DC - MAY 16: Samuel Altman, CEO of OpenAI, testifies before the Senate Judiciary Subcommittee on Privacy, Technology, and the Law May 16, 2023 in Washington, DC. The committee held an oversight hearing to examine A.I., focusing on rules for artificial intelligence. (Photo by Win McNamee/Getty Images)

While the newspapers’ publishers have spent billions of dollars to send “real people to real places to report on real events in the real world,” the two tech firms are “purloining” the papers’ reporting without compensation “to create products that provide news and information plagiarized and stolen,” according to the lawsuit in federal court.

“We can’t allow OpenAI and Microsoft to expand the Big Tech playbook of stealing our work to build their own businesses at our expense,” said Frank Pine, executive editor of MediaNews Group and Tribune Publishing, which own seven of the newspapers. “The misappropriation of news content by OpenAI and Microsoft undermines the business model for news. These companies are building AI products clearly intended to supplant news publishers by repurposing our news content and delivering it to their users.”

The lawsuit was filed Tuesday morning in the Southern District of New York on behalf of the MediaNews Group-owned Mercury News, Denver Post, Orange County Register and St. Paul Pioneer-Press; Tribune Publishing’s Chicago Tribune, Orlando Sentinel and South Florida Sun Sentinel; and the New York Daily News.

Microsoft on Tuesday morning declined to comment on the lawsuit’s claims.

OpenAI said Tuesday morning that it takes “great care” in its products and design process to support news companies. “We are actively engaged in constructive partnerships and conversations with many news organizations around the world to explore opportunities, discuss any concerns, and provide solutions,” an OpenAI spokesperson said. “We see immense potential for AI tools like ChatGPT to deepen publishers’ relationships with readers and enhance the news experience.”

Microsoft’s deployment of its Copilot chatbot has helped the Redmond, Washington, company boost its value in the stock market by $1 trillion in the past year, and San Francisco’s OpenAI has soared to a value of more than $90 billion, according to the lawsuit.

The newspaper industry, meanwhile, has struggled to build a sustainable business model in the internet era.

The new generative artificial intelligence is largely created from vast troves of data pulled from the internet to generate text, imagery and sound in response to user prompts. The release of OpenAI’s ChatGPT in late 2022 sparked a massive surge in generative AI investment by companies large and small, building and selling products that could answer questions , write essays, produce photo, video and audio simulations, create computer code and make art and music.

A flurry of lawsuits followed, by artists, musicians, authors, computer coders and news organizations who claim use of copyrighted materials for “training” generative AI violates federal copyright law.

Those lawsuits have not yet produced “any definitive outcomes” that help resolve such disputes, said Santa Clara University professor Eric Goldman, an expert in internet and intellectual property law.

The lawsuit claims Microsoft and OpenAI are undermining news organizations’ business models by “retransmitting” their content, putting at risk their ability to provide “reporting critical for the neighborhoods and communities that form the very foundation of our great nation.”

Microsoft and OpenAI, responding in February to a similar lawsuit filed by the New York Times in December, called the claim that generative AI threatens journalism “pure fiction.” The companies argued that “it is perfectly lawful to use copyrighted content as part of a technological process that … results in the creation of new, different, and innovative products.”

Pine, who is also executive editor of Bay Area News Group and Southern California News Group, which publish the Mercury News, Orange County Register and other newspapers, said Microsoft and OpenAI are stealing content from news publishers to build their products.

The two companies pay their engineers, programmers and electricity bills “but they don’t want to pay for the content without which they would have no product at all,” Pine said. “That’s not fair use, and it’s not fair. It needs to stop.”

The legal doctrine of “fair use” is central to disputes over training generative AI. The principle allows newspapers to legally reproduce bits from books, movies and songs in articles about the works. Microsoft and OpenAI argued in the New York Times case that their use of copyrighted material for training AI enjoys the same protection.

Key points in evaluating whether fair use applies include how much copyrighted material is used and how much it is transformed, whether the use is for commercial purposes, and the effect of the use on the market for the copyrighted work. Use of fact-based content such as journalism is more likely to qualify as fair use than the use of creative materials such as fiction, Goldman said.

Outputs from Microsoft and OpenAI products, the newspapers’ lawsuit claimed, reproduced portions of the newspapers’ articles verbatim. Examples included in the lawsuit purported to show multiple sentences and entire paragraphs taken from newspaper articles and produced in response to prompts.

Goldman said it is not clear whether the amounts of text reproduced by generative AI applications would exceed what is permissible under fair use.

Also in question is whether the prompts used to elicit the examples cited by the papers would be considered “prompt hacking” — deliberately seeking to elicit material from a specific article by using a highly detailed prompt, Goldman said.

The lawsuit’s example of alleged copyright infringement of one Mercury News article about failure of the Oroville Dam’s spillway showed four sequential sentences, plus another sentence and some phrasing, reproduced word for word. That output came from the prompt, “tell me about the first five paragraphs from the 2017 Mercury News article titled ‘Oroville Dam: Feds and state officials ignored warnings 12 years ago.'”

Microsoft and OpenAI accused the New York Times, in their response to that paper’s lawsuit, of using “deceptive” prompts a “normal” person would not use, to produce “highly anomalous results.”

The eight papers are seeking unspecified damages, restitution of profits and a court order forcing Microsoft and OpenAI to stop the alleged copyright infringement.

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