Frijda's theory of money (1914): still relevant for bitcoiners today

This week, Mount Gox, a very large provider of bitcoin services, couldn't live up any more to its services agreements with bitcoin users. It provided exchange and storage services for bitcoins, but due to a technical implementation flaw, the bitcoin holdings of users were compromised. Essentially it wasn't clear who really owned the bitcoins. The website went black and users can no longer claim their bitcoins.

Tumbling off the learning curve
I view the failure of Mt Gox as a logical consequence of the learning curve that bitcoin holders and bitcoin companies face. The bitcoin, although considered decentralized, is just as centralised a system as any other value transfer mechanism. However, for ideological reasons, the developers chose to only describe the technical heart of the system (the algorithm) leaving the rest up to the market.

This open source code approach has some advantages, among which a very speedy development of applications. Yet, we are for some time now witnessing what it means if systems lacks a central authority or scheme manager. There is no entity taking responsibility for the proper application of this scheme so no one is chasing users or companies because they don't abide by:
- usage conditions (demanding user identification),
- security requirements and certification of tools,
- specific legal frameworks.

As a result we have seen a whole community of interested companies and users climbing up the payments, banking, investments and monetary learning curve. The inevitable consequence is that those who do not get it right, will pay a price, while the others continue to learn. Due to the digital nature of bitcoin, these developments unfold rapidly, allowing us a compressed overview of interactions and developments from financial history.

Frijda's theory of money (1914)
The essential lesson at stake is that the usage of any value transfer mechanism does not just rest on its acceptance by users, but just as well on the rules and regulations that underly the value transfer. In 1914, the Dutch lawyer Frijda analysed this topic in his dissertation on the theory of money. At that time discussions emerged on the nature of banknotes. Did they have value because they were exchangeable for bullion, because they were defined as legal tender or because the public used and accepted it?

Frijda pointed out that the underlying legal framework that safeguards property in a society constitute a necessary precondition for the use of payment instruments. Without such safeguards, people will tend to stick to other stores of value rather than attaching value to local bank notes. Until today this effect is clearly visible: consumers tend to hold and use foreign cash or commodities if they live in country with a lot of curruption, a weak system of justice and an instable monetary climate.

Trust is built by institutions and markets
What makes money tick is a solid institutional basis, upon which trust can be further developed. The latter part can be done by a combination of regulation (supervision) and self-regulation (market action). Which brings us back to the Mt Gox cas.

Following the events of this money, a statement was released by the bitcoin companies Coinbase, Kraken, BitStamp, Circle, and BTC China. The industry leaders committ to safeguarding the assets of customers, to applying strong security measures, to using independent auditors to ensure integrity of their systems and to have adequate balance sheets and reserves to be able to ensure continuity.

In sum we can now see both a gradual development of both the institutional framework for virtual currencies and the market-driven self-regulation. This reflect the fact that - whether you like it or not - trust for financial services is always built on institutions, regulations and self-regulation.

Koepel de Stoop rest on the pillars of the exchange of Hendrick de Keyser

As some of you may know, I am quite busy researching and documenting the financial history of Amsterdam. And just today I stumbled accross an interesting find. It all started with the book `Woordenschat, verklaring van woorden en uitdrukkingen' of Taco de Heer en E. Laurillard, dating back to 1899. This explanatory dictionary, edited by Ewoud Sanders contains all kinds of expressions of the Dutch language. As such it is already one of the treasures of the Dutch language of the 19th century.

My eyes fell on the description of the word 'Paalgebouw'  (litterally: building on Pillars). This nickname was given in Amsterdam to the temporary exchange that could be found on the Dam, between 1836 and 1845. Now what intrigued me is the additional description that I read. It said: 6 of the old Pillars of the Exchange of  Hendrick de Keyer are now supporting a domed roof of the homestead of J.B. Stoop, at Woudenberg (near Utrecht).

So with the help of technology (mostly Google, I must say), I ventured out and discovered that there still is a place called the Stoop Dome ('Koepel van Stoop') near Woudenberg. And with the use of this location in Panoramio, I ended up with the picture below:

Well, look at that, those pillars might be all that's left of the Stock Exchange of Hendrick de Keyser. And while one site claims that this is a myth, the Dutch Monument Register contains a description confirming that these pillars are quite likely to have come from Amsterdam. See also this more detailed article.