Currency: From Cowrie Shells to Crypto
How we dematerialized the dollar
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The US Mint has announced that production of the “cent” coin, commonly known as the “penny,” is to gradually cease. The reason? It costs more than one cent, nearly four cents, in fact, to produce a single one-cent coin. As a consequence of this action, all transactions in the US will have to be rounded to the nearest five cents. As we have seen in our study of human progress, the cornerstone of human advancement is finding ways of doing more with less. As our technology advances, our needs dematerialize along the way. Long overdue, the elimination of the penny represents another step forward in the dematerialization of money itself. A process that has been underway for centuries.
Money
Before the invention of “money”, all trade had to be conducted in a barter-like manner. I could trade my three chickens for one ox, for example, but such transactions can only occur when each party has something the other wants and is willing to trade. This places a hard limit on trade itself as barter transactions break down when these conditions are absent, creating unnecessary friction in the economic system. The invention of “money” was a prerequisite for overcoming these frictions. Think of money as a mechanism of exchange, an information system that records value and helps facilitate beneficial economic transactions.
In this work on currency, Sam Harsimony writes that a good currency needs to meet a few requirements:
Measurability- There must be some kind of scale or units for the currency. A currency that cannot be counted is largely useless.
Belief in value- Notably, currency doesn’t need “intrinsic” value to work. It only needs “belief” in value, that is, others must be willing to accept it in exchange for goods or services.
Resistance to forgery- Currency loses its value if anyone can produce or find more of it. Scarcity is essential to maintaining belief in value.
Early forms of money included natural physical assets, such as seashells or salt. Cowrie shells, for example, were used as money by societies from Africa to the Americas for millennia. They were a natural form of currency because they required no human knowledge to produce, but because they were somewhat scarce, a value could be ascribed to them. They were also small, durable, and could be easily strung together for portability. Eventually, however, most societies found that metal coinage was a superior form of exchange. Coins, often made of copper, silver, or gold alloys, could be produced in controlled quantities and with controlled metallic content. They were even more durable than cowrie shells, and because they were made of metal, they could even have intrinsic value.
Metal coinage, however, had a serious drawback: weight. Storing and transporting a large number of heavy coins was a challenge, and this became more obvious as our economies grew and transactions grew ever larger. The solution came from China in the Song (618–907 CE) and Tang (960–1279 CE) Dynasties. The Chinese invented “paper” money, a lightweight stand-in for “money” that didn’t have intrinsic value but was redeemable for coinage and precious metal. The challenge with paper money, of course, was preventing counterfeiting; to combat this, paper notes were intricately printed with complex patterns to make them difficult to replicate. This is a challenge that persists to this day.
It took centuries before paper money spread outside China and into the Western world. The United States also eventually adopted a paper money system similar to that pioneered in China. Government-issued “certificates” were pegged to a set amount of gold or silver, theoretically redeemable for the precious metal upon request. In reality, however, because of fractional reserve banking, there were always more certificates in circulation than actual physical reserves backing them up. This was intentional as the money supply needed to expand faster than the reserves ever could; only a fraction of the reserves were truly backed up. If every certificate holder demanded conversion simultaneously, many would have been unable to redeem the precious metal owed to them.
Depegging and Dematerialization
The problems with pegging currency to physical assets, even if only fractionally, became evident during the Great Depression when it hindered the government’s ability to fight the economic malaise. In 1933, Franklin D. Roosevelt ended the gold standard for domestic transactions and simultaneously devalued the US dollar. The dollar was further depegged from gold on international transactions under Richard Nixon in 1971. As this happened, silver certificates and silver coinage were also phased out. Over 40 years, the US gradually switched to a pure “fiat” money system whereby dollars were no longer redeemable for physical assets like precious metals.
Fiat money maintains belief in value only insofar as people believe in or trust the issuing authority, and to some extent, how much they fear it. Sovereign governments, as we have discussed, are bestowed a monopoly on violence in exchange for maintaining order. This includes the capability to issue legal tender and enforce its general usage, including the collection of taxes, within its borders. The belief in value, therefore, is created through a combination of trust and coercive force. The sovereign also uses its monopoly on violence to prevent forgery to further maintain its value. Though, ironically, the sovereign can also print more at will to undermine the currency, if it were so inclined.
Although no longer backed by physical assets, fiat currency still needed to be printed on a physical medium. As the Information Technology revolution swept through the finance industry, however, the need to even print paper money also rapidly declined. Increasingly, transactions, small and large, were done electronically by manipulating ones and zeros on a computer; literally by adding and subtracting numbers from a digital balance sheet. In this new world, no physical medium was needed to make transactions at all. There are limitations, however. Though no physical money is actually moved around, digital transactions must still occur through the existing banking and financial infrastructure ensure verifiability and protect against digital forgery. Significant expense must be dedicated to ensuring that digital transactions represent real-world financial movements, and thus, they must still follow the old financial order that reigned when paper money dominated.
This is the problem that cryptocurrency attempts to solve. A true digital currency, one that is purely informational, could complete the dematerialization of money and bypass the heavy hand of the existing financial infrastructure. Instead of relying on a government or central authority to maintain belief in the currency, cryptocurrency can be built on a decentralized or permissioned “blockchain” or use distributed ledger technology (DLT) to ensure security and traceability without centralized control. With a cryptocurrency, users can directly hold digital money as if they had a wad of cash in their wallets, enabling direct (peer-to-peer) transactions without intermediaries like banks or other Fintech companies, greatly reducing the complexity of transactions and bypassing the fees intermediaries collect along the way. For a more detailed look at how cryptocurrencies work, I recommend that you read Sam Harsimony’s article below:
Here, arguably, China is again leading the way with the creation of the "digital yuan,” the digital embodiment of its physical currency. The United States Federal Reserve had also been exploring a “digital dollar,” but in 2025, President Trump signed an executive order banning the development and use of central bank digital currencies (CBDCs). Where exactly the future of money goes from here is unclear, but the trend is unmistakable. Money has been transformed from a physical medium that needed to be found or produced from atoms into one that exists only in the digital realm: pure, unadulterated information. For most of us, the dematerialization of money is all but complete.
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This is thoughtful and useful, JK -- thank you. The "money as information system" framing is doing good work and immediately pinged my interests.
One thread worth developing further: the trust architecture underlying each monetary form. You note fiat requires "trust and coercive force" — but every currency system has a trust architecture, whether based on natural scarcity (cowrie shells, gold), institutional probity (central banks, legal frameworks), or cryptographic verification (blockchain consensus). The trust doesn't disappear with dematerialisation; it relocates.
This matters because currency is institutional — it carries significant inertia — while technology can shift the underlying trust equations rapidly. That mismatch creates transition risks that a few cases might illustrate:
**India's 2016 demonetisation** — the government invalidated 86% of circulating currency overnight, intending to accelerate digital payment adoption. The economic disruption disproportionately affected informal workers and rural populations who lacked access to the digital infrastructure the policy assumed. [https://www.imf.org/en/publications/wp/issues/2019/03/01/cash-use-across-countries-and-the-demand-for-central-bank-digital-currency-46617]
**Sweden's cash phase-out** — often cited as a dematerialisation success, but the Riksbank has raised concerns about payment system resilience and financial exclusion, particularly among elderly populations. They've actually slowed the transition. [https://www.riksbank.se/en-gb/payments--cash/payments-in-sweden/payments-in-sweden-2020/1.-the-payment-market-is-being-digitalised/cash-is-losing-ground/]
**El Salvador's Bitcoin legal tender experiment** — early data suggests low voluntary adoption despite government incentives, with most users converting back to dollars immediately. [https://www.nber.org/papers/w29968]
Each case involves technology enabling change faster than institutional trust architectures could adapt. The dematerialisation trend seems clear; the governance of transition pace may be where the real risk lives.
It took me a long time to understand that the money obtained via loans was money created out of thin air, with nothing but the reserve requirements and promises to honor it as backing. But as I learned more about the nature of money as an agreement among users, I came to realize that ALL money (commodity, paper, or digital) is prefaced on such an agreement, and the hard part is providing and removing the supply of "money" as the economic demands for it expand and contract.* I have said before that I consider money to be the lubricant of an economy, not the fuel. The "fuel" is the innovation and ideas and entrepreneurship that ventures to create new wealth beyond what had existed previously.
Thus we allow or delegate to a government as sovereign over much of our lives the additional duty to manage that money quantity and quality. Trying to separate this governmental management function to avoid any liberty reducing governmental interference in - and detailed knowledge of -personal and private transactions seems to be an issue that may not truly be possible. The part of cryptocurrency that I still don't really understand or see as "money" is just how its quantity in circulation can grow and shrink as the economic situations requires. Maybe if I now "read Sam Harsimony’s article" it will address that gap?
*Some people cite the use of gold specie as being evidence of a money that "worked", especially the British pound as provided by the Bank of England starting around 1790 or so. However, that was also a timely situation or result to be available to fund the industrial revolution (and I understand also significant parts of the American economy in the early 1800's.)