For Bitcoin, Lessons In The History Of Failed Currencies

If someone were to perfect a flying car, governments around the world would be faced with a conundrum. Over the centuries humans have developed a transport system complete with quaint country streets, bustling six-lane highways, electronic toll booths and police officers to monitor it all. So should the powers that be try to fit the flying car into the current model or create a whole new scheme that allows the new technology to flourish?

A comparable question of positioning is the biggest challenge facing Bitcoin and other digital currencies, says Edmund Moy former director of the United States Mint. In an interview earlier this year Moy said, “Government moves very slow and cautiously. Digital technology moves very quickly, so eventually the conflict is going to be crypto-currencies moving faster than what governments are comfortable with.”

On Tuesday the U.S. government took a step toward fitting Bitcoin into the existing monetary framework when the Internal Revenue Service issued a notice declaring that virtual currencies will be taxed as property. The IRS pointed out that while Bitcoin may operate like “real” money “it does not have legal tender status in any jurisdiction.” So if you exchange Bitcoin for a good and that good is worth more than what you paid for the Bitcoin you need to pay tax on the difference.

The notice has sparked a fierce debate about whether Bitcoiners can, should and will continue using Bitcoin to buy everything from cupcakes to space travel.

Kashmir Hill, FORBES’ own Bitcoin aficionado, reported on entrepreneurs who are already developing software that should make calculating Bitcoin related tax liability easy. But Georgetown Law Professor Adam Levitin wrote on the blog Credit Slips, “Bitcoins are not fungible, and that makes it unworkable as a currency.” Even Bitcoiners are divided. One thread on discussion forum Bitcoin Talk is called “Bitcoin is doomed. Thanks IRS!!! You A** hats!” and another is titled “Bitcoin is hardly ‘doomed’ because of the IRS ruling.”

Moy, now Chief strategist at gold-backed IRA provider Morgan Gold, explained that changes in how we pay for things have always brought suspicion. This was true when we went from making coins from precious metals that equaled their face value to bank notes to coins which used cheaper metals but came with governmental assurance that this 10 cents of metal is really worth 25 cents. Some people thought paper bills were the beginning of the end. And Moy's 86 year old father still prefers checks to credit cards.

Nevertheless, says Moy, "precious metal still stays with us in the form of bullion coins. Checks are still used, although there is a diminishing market, and credit cards are still growing. Just because there are several evolutionary steps doesn’t mean that the latest step is a giant killer that eliminates everything else. Each form of currency has found its niche, those niches may be shrinking or growing, but they all co-exist.”

While payment systems tend to evolve, specific currencies have come and gone over the centuries. Take for example the Continental Dollar of early America. Writing by email from Mongolia Jack Weatherford, author of "The History of Money," explained that Brits immigrating to the American colonies were not allowed to import British money. After failed attempts to use the Mexican silver dollar -- there simply weren't enough to finance a revolution -- they started issuing paper dollars  known as Continental Dollars.

"Like the Bitcoin, it was a revolutionary idea that got out of hand and the value of the dollars dropped drastically," writes Weatherford. "After the revolution, the US abandoned paper money and returned to the use of coins. It took another century before the US government was able to create an effective paper money system."

According to Benjamin Alsop, curator of the Citi Money Gallery at The British Museum, coins were first created about 2,600 years ago in modern Turkey, when people had already been tracking financial transactions in some way for about 2,000 years. These coins were created by some central authority as a way to standardize, but also brought control to the central authority. "I supposed that is one thing Bitcoin doesn't do," says Alsop.

Within two hundred years coin like items appeared in two other distant regions.  At the time in China there was Spade and Knife money, small bronze items shaped like spades and knives. "There was obviously something during that period that meant humans were beginning to get a handle on their monetary systems." Coinage brought ease of trade and transport which society hadn't had before.

About 1,000 years ago bank notes were added to China's monetary system, bringing in a new level of trust because the notes didn't have any intrinsic value but were meant to represent a certain number of coins. The idea thrived until the end of the 14th century when power struggles led inflation and counter fitting to became known problems. China didn't produce bank notes again until the 19th century.

In the 17th century the British government wasn't creating enough small coinage. "Where there was a lack of coinage people would step in and create their own away from the constraints of government," says Alsop. The coins that popped up in various cities were frowned upon and technically illegal, but among the people who accepted them they existed comfortably. The currency largely faded out but in communities around the U.K. you can still find niche payment systems.

"So [Bitcoin] does have an exemplar in history in this idea that it is not created centrally or officially. People have always found a way to meet their own personal needs when it comes to money." But with Bitcoin and virtual currencies still on the fringes in terms of usage, the biggest challenge for Alsop as a curator is how to talk about it and display it.

"Bitcoin will not be the money of the future," predicts Weatherford who believes governments need to give up or lose control of currency before virtual currencies can really take off, "but the money of the future will look more like Bitcoin than the money we have in our pockets and banks today."

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