The following content isprovided under a Creative Commons license. Your support will helpMIT OpenCourseWare continue to offer high-qualityeducational resources for free. To make a donation or toview additional materials from hundreds of MIT courses,visit MIT OpenCourseWare at ocw.mit.edu. PROFESSOR: So today, whatwe’re going to be doing is– last week, you gaveus some feedback what you wanted to do in the class. We’re going to go through thatand talk about the readings. I’m going to do alittle calling on you and helping you take theclass through the readings. And then the six or seventhings I’m going to do– history of money; ledgers;fiat currency, central banks, and credit cards;the role of money; some early digital money.You had the Clark reading asto a bunch of failed attempts. All the way through alittle bit of mobile money, all the way up toStarbucks and Alipay. And yet, the riddle remains. We’re going to getreally deep into Bitcoin in the next three classes. But this is to givesome foundational bits of money and ledgers andcentral banking and technology. And then, of course,I always like to finish the classtalking a little bit about why we’re doing what we’redoing between now and then.Even though thereadings are required, I know you’re all busy. I know that you’ve allgot a bunch of classes. And like good businessstudents and business people, you optimize. So I’m trying to give you asense of why you might read it, rather than it’s required,at the end of each class and how it fits intothe course narrative. And then we’ll do alittle bit of conclusions. So the survey results. What did you want to learn? This is reallyyour class, and I’m going to learn as much from you. But hopefully, we’re goingto cover what you want. So here’s a list of those thingsthat were at least written by two of you.First was technical things. 18 of you said understandingblockchain technology. Hopefully, we getto that, but you might find that you’ll wantto do more after this class. The ecosystem and being ableto have an educated discussion, sort of the dinner partyconversation around blockchain. I think we’ll be successful. But at the end ofthe semester, we’re going to pull theseslides up again, and we’ll see howwe did as a group. You all talked a lotabout applications. How can you actually apply it,learning in the venture space and thinking about where itreally works in the world. And I think we’re goingto spend a lot of time on that in the second half. But all throughout,we’re going to be talking about theeconomics and what’s the reality versus the hype. You also wanted to understandits impact on people’s lives, the regulation. About six of you saidsomething about regulation. I’m glad, because we’re onlydoing one lecture on that.But we’re goingto spread it out, because as we talkedabout in our first class– and I’m honoredLarry’s here again– but we’re going to always bethinking about Larry’s four ways. And I see– is it Jihei? What are Larry Lessig’s– you shook your head yes. AUDIENCE: I know– let’s see. It is code and architecture,market, law, and norms. PROFESSOR: You got it. Does anybody want to say howthat relates to blockchain, why we’re chatting about that? Oh, my god, I’m going to haveto cold call fast, right? You’re from R3. Joe? AUDIENCE: No, I rememberwe saw it last class, but I can’t relateit now to blockchain. PROFESSOR: Can you relateit to anything in life? Maybe not. Alan, help your tablemate out. AUDIENCE: I’m waitingfor my moment to shine. PROFESSOR: This isn’t it. AUDIENCE: This isn’t it. PROFESSOR: I’m having fun. This is what I’m going to do.I’m just going to have– don’t worry about it. So why do markets, code, law– I can’t see your name,but is it [INAUDIBLE]?? Yeah, why? Why does thatrelate to all this? AUDIENCE: Can yourepeat the question? PROFESSOR: Jihei, you’regoing to repeat the question, because you went through it. AUDIENCE: So how doesLarry’s four forces relate to our topic of blockchain. PROFESSOR: And the fourforces, again, are market, so business; law;code or architecture, call it technology;and social norms. AUDIENCE: So I thinkit’s because it brings a new way ofdoing those things, like a new tool in order to– so what I got from the readingis these ledgers already existed, but given that nowwe have big data, for example, then more things going on helpsour society roll it out better.PROFESSOR: Good way to say it. Look, it’s unfair of me. It wasn’t one of the readings. I’m just saying, ineverything in life, I find these things grindup against each other. I spent a lot of time inWashington in politics, but the markets and howthe commercial enterprise and the economy grinds upagainst technology and sort of grinds up against the law– and then, of course, justsocial normative behavior. These four forces, in almosteverything one does in life, you will find. And so I just ask youto always, whether it’s one reading or anotherreading, bring that into your thoughtprocess of this class. I’m not going to assignLarry’s assignment. I didn’t know he waseven going to be here. But I’ve always thoughtit’s a good discipline to think, OK, what arethe commercial realities, the markets? What’s the technology, evenif it’s in an earlier day and it’s the technology ofthe car replacing the horse and carriage? How does governmentor the official sector put it into a set ofstandards that are required? And then how dowe, as a society, even if it’s not required,just have our behaviors? Those are the four forces.So that’s why. I probably justfailed Larry’s class, but that’s how I’vethought about it. I did, probably, right? No, he’s shaking his head. But regulation is justone of those four forces. And that’s why I pause there. And so we’ll have it in everyclass, but only one lecture. Money and markets, that’sone of the other forces. Five of you said youwant to make money, and I applaud those whosaid that, because own it. You’re in a business school. Why not? But investing and trends. Now, there was a bunch ofother miscellaneous topics. I’m not going togo through them. I kind of thought the last twowere interesting– anecdotes from my past. I’m not sure who said that. I’m not sure what you wantto know about– my three daughters, my running, or thisWall Street stuff and finance.And I’d like to understandhyperbitcoinization, as well, but I don’t know whoasked that question. I don’t know whatit is, so I’ll try to figure out whathyper– does anyone want to own up to that question? They were anonymous. All right. All right. So today’s study questions. What’s the role ofmoney historically and in today’s digital economy? And this is when I’m goingto look for discussion. So does anybodywant to tell me what the role of money– whatwould be your answer to this? Anton? AUDIENCE: The medium of thetransaction, and the unit of– like a counting unit.And also, thestate of the value. PROFESSOR: So the threeclassic rolls of money that people talk about. Kelly, you want torepeat what he just said? AUDIENCE: [INAUDIBLE]the question, but I think historically,it was pay off debts, starting and conqueringvarious lands and wards, and then also fundingtrade wars, cutting taxes. So a lot of societal thingsthat drove civilization forward. PROFESSOR: And whatwe’ll discuss today and what it is, is thatmoney is a social construct. It’s something thatsocieties came together– it’s hard to tell whether itwas 5,000 years ago or 8,000 or 10,000 years ago. Really, it’s a socialconsensus mechanism. But we’re going to chat aboutthe readings in a minute and come back to that question. What is fiat currency? Does anybody want to– Tom, you want to tell uswhat fiat currency is? It’s a shame, Tom. See, I recognize you. AUDIENCE: [INAUDIBLE]. This is like aestablished currency by a central government, bya government that proposed a market or [INAUDIBLE].PROFESSOR: Right. So you said it’s acentral currency, and it’s by government. Anybody else wantto add some things? Is it Kyle? AUDIENCE: I would justadd that it’s not backed by any physical commodity. PROFESSOR: So it’s not backedby any physical commodity. AUDIENCE: Yeah. Really just the good faithand credit of the nation that issues it. PROFESSOR: Daniel, didyou want to add anything? AUDIENCE: I was justgoing to say somewhere that it’s not gold backedor anything like that.PROFESSOR: But wasit always that way? AUDIENCE: It wasn’toriginally that way. PROFESSOR: Right. A fiat currency might bebacked by something physical. Was there other–remind me your name. I’m sorry. AUDIENCE: Josh. PROFESSOR: Josh. AUDIENCE: Specificallyused to settle debts, specifically thoseto the government, so taxes. PROFESSOR: All right, soit can be used for taxes. And remind me of your name,because I can’t see a card. What? AUDIENCE: Sean. PROFESSOR: Sean. AUDIENCE: So, basically,there’s no inherent value in fiat currency. So basically, there’sno one recognize that specific currency itself. There’s no government. PROFESSOR: So here’s aquestion for the class. Is there inherent valueto non-fiat currencies? Because Sean’s saying that maybea distinguishing characteristic of fiat is it hasno inherent value. AUDIENCE: Terry. PROFESSOR: Terry. AUDIENCE: Well,actually, the same applies to any commoditythat’s used to– currency in general. Because it’s just the scarcityof some specific resource and social commonagreement that that’s going to be the parameter.PROFESSOR: So how many peopleare more in line with Eric or– there’s not oneright answer to this. This is a questionthat’s been debated for decades or centuries. How many are morein Sean’s camp? AUDIENCE: I think it depends. For example, gold isdefinitely a social construct. We decide that, asa human society, that gold is going tobe something valuable. But if it’s, like, grainsthat humans can [INAUDIBLE] and that, I think,has an inherent value.So I think there arenon-fiat currencies that does have inherentvalues and that does not have inherent values. PROFESSOR: All right,anybody– what’s your– Jihi, yeah. Tom? Tomas? AUDIENCE: Tomas. I just want to saythat the [INAUDIBLE] is another component which thefact that it is a legal tender. So the governmentand some [INAUDIBLE] forced the society to use thecurrency, which makes more comfortable for people to use. PROFESSOR: So Tomas issaying that fiat currency is legal tender. So first, we have to discuss,what is legal tender? Does anybody want toknock that one out of the ballpark who hasn’traised their hand yet? No? All right. AUDIENCE: I think that’smaybe my earlier comment. It can be used to settledebts, and specifically those to the government. So you can use gold as a money. It can be a stored value. It can be a means of exchange. But you can’t pay yourtaxes in gold, right? You have to– PROFESSOR: Is that correct? So 19th century, could you payyour taxes in gold in the US and in Britain andother countries that had gold currency? This is just a yesor no, but James? AUDIENCE: It’s yes, but after1970s, the paper currency is attached tothe gold standard.So inherently, thereis an exchange of value that is picked by thegovernment or the central bank. So it’s almost one of thesame thing at that time, until more recent years. PROFESSOR: James is saying youcould use gold as legal tender. Legal tender,again, is something that a society comestogether and creates a law– back to the Lessig four. Society togethersays– it’s not just a social normative behavior. It’s a law. One must accept this. And the US and theUK and many countries it says for all debts,public and private. So a debt to the governmentor a debt in a store. We’re going to getto, later, as to when is it true that somebodyhas to take your cash. But I’m going to holdoff on that in a minute and talk about it. But I think, also, Jihei said– it was somewhere between Seanand Eric, both physically in the class and in termsof her articulation– that fiat currencymight not have anything inherently behind it.But gold mostly doesn’t haveanything inherently behind it. And then some forms ofcurrency, like grain, had more. So maybe it’s a continuum. Maybe it’s not blackand white, 100% or 0%. And then we’re goingto talk a little bit about how Bitcoin fits into it. And our next threeclasses are going to be really into thetechnology of Bitcoin, but just a little bitof teasing out before I go through some lecture slides. Who wants to talkabout how Bitcoin might fit into this history of money? And then I’m going to returnto that question in about 45 minutes and ask you again. Does anybody want tosay from the readings? And you remind me your name? AUDIENCE: Isabel. PROFESSOR: Isabel. AUDIENCE: So withBitcoin, it’s kind of the same, wherethe value is given by society, exceptwith Bitcoin, it’s not backed by a central bank. So people don’t think thatthere is an inherent value. But the readingspointed out that there’s sort of that same history,except it doesn’t have [INAUDIBLE]. PROFESSOR: So Isabelis saying that Bitcoin fits into the history of moneybecause, like fiat currencies and like Jihei said aboutgold, it doesn’t necessarily have any inherentmonetary value, but it’s a societal set of normsthat people are accepting it as having value.But the key distinctionthat Isabel said was that it’s no central. AUDIENCE: It’s not backedby any kind of central bank. PROFESSOR: It’s notbacked by a central bank or a central authority. Alan? AUDIENCE: Yes. So Bitcoin, in myopinion, is unique, because I think the value ofBitcoin changes over time, not the fluctuation that wesee like $6,000 or $90,000, but in terms of theutility of the coin itself. So today, for example, we mightbe able to buy pizza or coffee or whatever with Bitcoin, sothere is an inherent value in terms of medium of exchange. And it will change as societyadopts it more and more. So I think it’s hard to defineif there is inherent value or not. PROFESSOR: So Alan israising that Bitcoin– if I can put somewords in your mouth, and tell me if I’mcorrect, that Bitcoin might have somedistinguishing features from even fiat currency,that its value is shifting over time with adoption. Is that– I mean, youdidn’t use that word. Please let me knowyour name again. AUDIENCE: Brotish. PROFESSOR: Right. Like British, but with anO, you told me earlier– Brotish. AUDIENCE: Another way Iwas thinking of [INAUDIBLE] the evolution of the latertechnology like accounting and the evolution ofmoney, along with– so initially, wesaw in the reading how it happened in theprehistoric age and then the advent of the [INAUDIBLE]and then [INAUDIBLE] later, which is kind of oneof the fundamental blocks of Bitcoin. PROFESSOR: Right. AUDIENCE: So thatis another way kind of natural progressionof how money [INAUDIBLE].. PROFESSOR: Brotish? AUDIENCE: Yeah. PROFESSOR: So whatBrotish has raised is also Bitcoin fits intothe history of ledgers, whether it’s double entryledgers as recognized through T accounts or otherforms of ledgers, that it adds to this wholelong history of ledgers. I agree with that. And it’s a new formof keeping ledgers. Alan? AUDIENCE: So Bitcoin isalso similar to gold. There is an element of scarcity. PROFESSOR: Of scarcity. AUDIENCE: Yeah.So you cannot generatethat many Bitcoin. PROFESSOR: Correct. AUDIENCE: You can only generate50 bitcoins every 10 minutes, and it keeps happeningevery four years. PROFESSOR: So it seemslike scarcity and ledgers are important components. Aviva? AUDIENCE: Yes. So it does have a fixed demand– sorry, a fixed supply, likeyou said, in terms of scarcity. But the more weadopt it, the more it becomes divisiblein terms of units. And so we can increase its use,because now you can divide them up to [INAUDIBLE]. PROFESSOR: This is good. So divisibility is anothercharacteristic of money, scarcity, adoption asAlan said, ledgers. Sorry, Tomas? AUDIENCE: We mentiondecentralization, because this implementationmake feasible the Bitcoin and makes feasible toimplement this kind of thing in the decentralizedenvironment. So without any centralauthority to design or dictate the supply and all theaspects of the concepts. PROFESSOR: We’ll takeone more, and then I’ll start to talk about the history. Why don’t we go here? And remind me your name. AUDIENCE: Alexis. PROFESSOR: Alexis. AUDIENCE: [INAUDIBLE]of like money and other formsof currency, even if it’s controlled by centralgovernment or central bank, there’s no fixed exchange rate.It trades extremely quicklywith other types of currency, so I mean, it’sstill very different. PROFESSOR: So, Alexis, ifI understand Alexis’ point, it’s that there’s no fixedexchange rate about Bitcoin we’re talking about. But couldn’t we really broadenthat to all forms of currency? I mean, what reallyis the exchange rate between an ounce ofgold and a bushel of corn? AUDIENCE: Yes and no. I mean, yes, that, for example,some states do control exchange rates with other counties. PROFESSOR: Allright, good point. So Alexis is saying yes andno, because some governments try to fix. Now back to markets. How well does thatwork when governments try to fix an exchange rate? I mean, just as a sense of theclass, does that work well? So it sort of might work wellin temporal, short periods. Works less wellfor decades on end. I’ll take one more,and then I’m just– I want to go through a couple– AUDIENCE: Just one comment. That way you canteach hours of work.That’s how economies defineit previously, right? But I just want toask, what is a ledger? PROFESSOR: What is a ledger? Very good question. I’m going to be chattingabout that in a minute. But does anybodywant to hit that? I’m sorry. No, over here. AUDIENCE: I was goingto say, it’s just a numerical record of everythingrecorded, in a fashion. [INAUDIBLE] PROFESSOR: A numerical record. I think that’s a good thing. A ledger is basically a wayto record economic activity or social relationships orfinancial relationships. I would say it’s both a wayto record economic activity, and it’s a system of recordingfinancial relationships. And while I didn’tassign these readings, some very good academicresearch suggests that the first methods ofwriting and symbols of writing had to do with numbers andhad to do with ledgers, rather than words and communication. Because it’s sofundamental to society to record variouseconomic transactions or to record thefinancial relationships amongst and betweenmembers of a community, whether it was asmall village or when society burst out of villagesthousands of years ago.Does that help? We’ll be back to it. And better thatyou ask that here than in your accountingfundamentals class. I don’t know. So the readings– we’ve sortof talked about the readings. How many of you actually watchedthe little three-minute video? What’d you think? I mean, just as a– I’m sorry, here. We haven’t chatted yet. AUDIENCE: I think thebroad-based message was that any currency, oranything, for that matter, has value equivalent to whatthe society assigns it with. Because the videobasically just showed a guy who created hisown currency and was just selling it to the public. And his whole claimwas that it is real if you believe it is real. PROFESSOR: So it was just anice little ditty, in a way. Matthew, I’m sorry? AUDIENCE: I would havegiven him $1 for it. PROFESSOR: You wouldhave given him $1? Great. AUDIENCE: Seeing howmuch the pizzas went for. AUDIENCE: Who knows? PROFESSOR: Would anybody elsehave given him $1 for it? No? Oh, you would have? AUDIENCE: Actually, I’mworking with local currencies. And it’s kind of the same, butyou can use them just locally.I mean, it keeps themoney inside the community that decides to use thatway of transactions. PROFESSOR: We’re going to referback to each of these readings as we go throughthe next 45 minutes. Yeah? AUDIENCE: I was wonderingif he was actually breaking the law bylaunching his own competing currency to the US dollar? Is that a legitimate– obviously, it didn’t competewith the US dollar, but– PROFESSOR: You raisea very good question. I’m not aware of anystatute, federal or state, that says there’s an absolutemonopoly on forms of currency as there is in otherthings, like you know that slot in thedoor that’s called the– where you can put a letterthrough the door or a mailbox? There’s actually a law that saysthat the US Postal Service has a monopoly, andthat’s why UPS is not allowed to put their boxesor anything in there. There’s a governmentfiat monopoly. But you raise avery good question. What we’ve found in thelast 10 years with Bitcoin, with reallyoversimplifying, is that it is legal to createyour own form of money, as Bitcoin ispossibly this money.But you have to complywith all the other laws. And all those other lawsthat we’ll talk about in other lectures,in essence, fall into buckets of guardingagainst illicit activity, so the Bank SecrecyAct and all the laws related to anti-moneylaundering and terrorism finance and so forth. One still has to pay your taxesif you’re gaining or losing on this investment. The Federal Reserve and otherauthorities around the globe still want to insurefor financial stability. The fellow on the streets of– I don’t remember what city. New York? Selling his dollars, whenMatthew bought it for $1 and I think over here– Brianna? AUDIENCE: [INAUDIBLE] PROFESSOR: What’s that? AUDIENCE: My name? PROFESSOR: Yes. AUDIENCE: [INAUDIBLE] PROFESSOR: Bought it. The society’s stillgoing to be stable. It’s going to be all right. But if millions ofpeople were buying it, then people might worry. And then there’sthe third big bucket that we look at is investorand consumer protection. But I think it’s allowed. So we’ll refer tothese, Joaquin, and then I’m going to go on. AUDIENCE: Can youlegally pay, for example, salaries in bitcoin in the US? PROFESSOR: Yes.And why is it thatyou can legally pay for wages in bitcoin in the US? I know it’s outsideof the readings, but why do you think it isallowed in this society? Is it Kyle? AUDIENCE: Wouldn’tthose compensation forms be allowed under any contract? PROFESSOR: Most things–you could pay somebody in these placards. I doubt, really, that you’regoing to value them much.But you could paysomebody in this. You could pay somebodyin gold, euros, bitcoin. And there are firmsthat are paying– usually, they’re developingblockchain applications. And interestingly, they have tocompute the value of the wages to do withholding taxes, becausethe US government will not accept taxes in bitcoin. So they figure out thefair market value– and there are companiesin the US that pay people in bitcoin who aredoing development work around blockchain applications.But the taxes need to becomputed and analyzed and then paid in US dollars. There was a legislativeinitiative in Arizona earlier this year wherea state legislature wanted to have Arizona bethe first state in the land to accept bitcoin for taxes. But it failed in committee. It didn’t even geta full vote of– I can’t remember if it was theArizona Senate or the Arizona House of Delegates. So just a little walkthrough the history. I was going to do alittle history of money and have some fun. So in Ethiopia, peopleput together salt bars.This is not that long ago. Salt, as Jihei said earlier,is really valuable in society, and they standardizethe shape and size. And so here’s salt bars. We’re going to get to,a little bit later, all the characteristicsof money. But what else do you thinka salt bar in Ethiopia, as opposed to maybesome other country– what did it have, as well, asto why people might use that? AUDIENCE: Oil. PROFESSOR: What’s that? AUDIENCE: Crude oil. PROFESSOR: Crude oil. All right, I hadn’tthought of that. I’m going to keepthinking about that. It’s not a commoncharacteristic of money. But why salt bars? What else might ithave in Ethiopia? AUDIENCE: Are yougoing to say that you can use salt to preserver food? PROFESSOR: Well, youcan preserve food, but because it was mined, therewas some scarcity, as well. And a lot of currencies,a lot of moneys over time, have that fundamental issue. Cowrie shells from West Africa. Does anyone knowthe history of when cowrie shells got reallydebased and stopped being used, from the readings? I can’t remember if thatwas in the readings or not. They got debased whenEuropeans started to realize that theywere accepted as a value. And it’s a very sad andterrible history, too, because it’s related tothe whole slave trade. But that the Europeanscould figure out that societies acceptedthis as something of value, but they alsodebased that currency and they debased the land andcaptured people as slaves. It was quite a collection ofnot particularly good things going on. Tally sticks in England. Does anybody, fromthe readings– because there was a littlebit of the debate in the first reading about thehistory of money– want to chat? And I’ll pull up theRai stones from Yap.How this fits into that firstreading and the debate between did money come froma history of barter, or did money come from ahistory of ledgers and credit, which is kind of a setupof that first reading? Any thoughts? Which ones of these fourbits of money, early money, are more about maybe barter? AUDIENCE: There aretwo theories, right? Debt, which correspondsto this one. This was a way to measure debt. PROFESSOR: Which one? AUDIENCE: The sticks. PROFESSOR: The sticks. The tally sticks, yes, correct. Which is the second one onhere that has to do with debts, actually, and credits? AUDIENCE: The stones. PROFESSOR: The stone,the Rai stones. So it’s remarkable. The Rai stones were so heavythat on this island of Yap, they couldn’t possiblylug it around and use it in a traditionalmedium of exchange.But it was viewed as, well,I have 1/6 of this Rai stone. You have 1/16. And then if I make anexchange, we’d remember. And the society was small enoughto keep a form of ledgers, even to the extent that when a Raistone was lost in a river, they said, you know,the river Rai stone, we each have this piece. So on the island ofYap, I can assure you, these stones could not beused for anything else. Does anyone know, because itwas outside the readings, what made these stones so scarce? So Rai stones were quarried onan island about 200 kilometers away from Yap, sowere they exceedingly hard to get, like gold,like mining of gold. What else is mined thesedays that might be a money? AUDIENCE: Lithium. PROFESSOR: What’s that? Can I hear everybody? AUDIENCE: I’m saying lithium.PROFESSOR: What’s that? AUDIENCE: For batteries. For batteries. It’s going to be verydifficult in the future for electricbatteries and whatnot. PROFESSOR: But what’smined right now that’s at the center of this class? AUDIENCE: Bitcoin. PROFESSOR: Bitcoin, right? The Yap stone was, in essence,quarried a couple kilometers away. And what debased that currencywas when sailors from England came. There’s a specific sailor– I think his name was O’Keefe– in the late 19th century, andhe realized that these stones were valuable. And he went to the otherisland, and he started quarrying and came back and forth. And within a few years,the whole economic system collapsed. We moved to metal money. At first, it wasn’treally stamped. It was just heavy. It was hard to quarry. Bronze in Rome. There was some China and Sweden. These were starting to bestamped by the official sector. And then we had minted moneystarting somewhere around 2,500 years ago. And there’s debatesas to whether it started in Greece or in China. But where an official emblem wasplaced upon a scarce resource that was used. Paper money came along, ina sense, for what reason? Why did society firsttip in to paper money? AUDIENCE: Because there’s notenough gold to back it up. I mean, like because there’s– PROFESSOR: All right. One reason is not enough gold. I’m sorry, I haven’t– AUDIENCE: I thinkit’s just easy to– PROFESSOR: Ease of use. It’s kind of heavy, especiallyif there wasn’t gold and if it was copper or bronze. It was just heavy. Or if it was wheat, you’d haveto put it in a storage unit. So the first papermonies from China were basicallywarehouse receipts. And I spent five yearsrunning something called a Commodity FuturesTrading Commission, and so I guess I learned alot about warehouse receipts, commodity receipts, where youput a commodity in a warehouse.And then you gota piece of paper that said, yes, you havethat commodity there. So the first papermonies were basically warehouse receipts in China. Because whatever itwas– grain or gold. And then you had a pieceof paper backing it. These are five poundnotes from England and the continentalnotes of the US. But that note in Chinais about 700 years old. But between that first papermoney and the 18th century, who do you think we’rekind of the first bankers in the late 17th century,early 18th century? What craft had they been inbefore they were in banking? AUDIENCE: Trading. AUDIENCE: Trading. AUDIENCE: Trading. PROFESSOR: Alpha? AUDIENCE: International trading. PROFESSOR: International trade. They actually didsomething more local. AUDIENCE: I justtalked about this. The ones that havelands and all the– the ones that have landsand all the [INAUDIBLE].. PROFESSOR: Lanes? AUDIENCE: Lands. AUDIENCE: Land. PROFESSOR: Land. Land. No, they had somethingelse that they were doing. Tom? AUDIENCE: Printmakers. PROFESSOR: Theywere printmakers. I like that. We’re not there yet. AUDIENCE: Money lenders? PROFESSOR: What’s that? AUDIENCE: They’reunderwriting insurance.PROFESSOR: A little bit later. AUDIENCE: They weredoing agriculture? PROFESSOR: It’s definitelyoutside of the reading. They were goldsmiths. Some of the first dominantbankers in London, they were small goldsmiths. And they took the gold, theygave you a piece of paper, and then they went from there. And then, all of a sudden, theyfigured out how to do credit. Later in thesemester, we’re going to talk about Bitcoin credit. It’s not there yet, by the way. I think in the next18 to 36 months, we’re going to start seeingcryptolending and cryptofinance in the form similar to whatthe goldsmiths were doing in the early 1700s in England.Alan? AUDIENCE: Is that scalable witha finite number of bitcoins, in your opinion? PROFESSOR: It’s avery good question. Is it scalable to lendagainst a finite currency? I think so, but it’snot done yet, right? AUDIENCE: Yeah, because whenyou lend money to someone, I guess it could be inthe form of bitcoin. But you lend someone dollars,they could redeem in bitcoin. You’d be increasing kindof the money supply. So you don’t need– you’re not moving money around. You’re actually [INAUDIBLE]. PROFESSOR: So this isexactly the central of commercial banking today. It’s called fractional banking. We’ll be talkingabout that in a bit. But yes, you could lend andthen have a multiplier effect. You also had, then,banks come up and started to issue private bank notes.Private bank notes effectivelya liability of that bank and saying it would trade. And the history of privatebank notes is usually what? Good until it’s really bad. And the history of money,a lot of private banks went bust in this countryaround the revolutionary period, again around the Civil War. And in essence, that’swhat we have now with 1,600 differentcryptocurrencies. We have sort of a newperiod of a little bit of private currencies. And I only ask you toremember that as we start to look at ICOs, InitialCoin Offerings, and so forth. So ledgers– the earlierquestion is, what was a ledger? You asked it. Can you remember,what’s a ledger? AUDIENCE: It’s a way torecord economic transaction. PROFESSOR: There you go. Principal recordingsof accounts. And 5,000 years ago– you had a little reading onthis, just a medium post. It wasn’t meant to be a deepeconomic, academic paper. But it was to try to get theclass thinking about ledgers. This is the personal ledgerof George Washington, our first president.He was 15 years old whenhe kept this ledger. And he apparently keptledgers until his death in– let’s see. 52 years later. So ledgers could bekept just to record the transactions of the day. He’s got one up there– Mary Washington. It must have been acousin, or I can’t remember if it was his mother. So if they’re the principalrecordings of accounts– and I’ve already sortof said this– they record economic activityand financial relationships. Economic activity in asense of transactions. Financial relationships– what’sa key financial relationship a ledger might record? I’m sorry? AUDIENCE: Debt. PROFESSOR: Kelly said it– debt. And it goes back to thedebate you had in the reading. Is money a history of barter– did it come out of barter? Did it come out ofa sense of debts and credit and store of value? For this purpose today,it doesn’t really matter.It may have come from both. But know that it has both sides. And ledgers haveboth sides, too. And when we’re talking aboutBitcoin, Bitcoin, you will see, is a mechanism tostore transactions. Some other blockchains, likeEthereum, stores balances. So even in theblockchain world, you will see some that arebalance ledgers and some which are transactionledgers, not to lose you and confuse you. It’s an important partof what is blockchain. Some types of ledgers. I just mentioned one–transactions versus balance. George Washington’sledger, by the way, I think was atransaction ledger. He was just keeping a listof sales and movements. But I haven’t studied PresidentGeorge Washington’s ledger close enough.Does anybody knowenough accounting to tell me the differencebetween a general ledger and a subledger or a generalledger and a supporting ledger? I mean, I don’t want to dothe whole lecture myself. How many of you havetaken accounting? Uh-huh. I taught undergraduateaccounting once. Sorry. So those of you who just put upyour hand who took accounting– did I see, in the back of theroom, did you take accounting? And that’s Aviva. AUDIENCE: I’m anaccountant, actually. PROFESSOR: You’re an accountant? All right, all right.Did you pass the CPA? Oh, we have a CertifiedPublic Accountant who’s going to tellus the difference between a generalledger and a subledger. AUDIENCE: So ageneral ledger is one that records allkinds of transactions. Any kind of activitythat takes place, you record in the general ledger. And subledgers, you can callthem as like a specialization. So let’s say if there’sa salary to be paid, you have your salary subledger. But it’ll also go inthe general ledger, and the other partof the transaction’s in the salary ledger.Or if there’s capital or ifthere’s new stuff that you buy, so all of that goes specificallyin the general ledger. And each of them havetheir own specific ledgers. If you want to sayhow much you spent on Saturdays for the month, thenyou go to your Saturday ledger and see. But if you want to see, overall,how much money you’ve spend and how much hasmoved around, then you look at your general ledger. PROFESSOR: Aviva clearly saidit better than I could have. Thank you. Now we know we haveone CPA in the class. But the importance– it’snot just a passing note. The importance of a generalledger and subledgers is there is ahierarchy, as well. Subledgers have more detail,and maybe the net number is kept in the general ledger. That is at the heart ofour system of banking and is at the heart of oursystem of financial markets, where the central bank is likea general ledger for money, and every commercial bank, all9,000 of them or so in the US, in essence keep asubledger for money.But they do nothave control of what I will call the master ledgeror general ledger at the Federal Reserve. Then, a third distinctionabout ledger is a single entry. A little, young, 15-year-oldGeorge Washington was keeping a singleentry ledger– just a list of thingsthat was going on. And I didn’t think I was goingto bore the class with readings about double-entrybookkeeping, because you’ve taken accounting. But does anybody want totell me, other than Aviva, what double-entry bookkeeping–and she’ll bail you out. [INAUDIBLE]? AUDIENCE: Double-entrybookkeeping basically means any transaction has twoplaces in the lender– one on the credit sideand one on the debt side. Because everytransaction involves one person lending,whereas the other person is getting the thing. PROFESSOR: It works for me. Anybody else wanta different view? AUDIENCE: In otherwords, [INAUDIBLE] asset and liability [INAUDIBLE]two sites and then [INAUDIBLE] to balance eachother [INAUDIBLE].. PROFESSOR: So there’s abalancing between assets and liabilities, andthen the resulting bit of capitalism in it is if assetsare more than liabilities, the rest is capital.So at the heart ofcapitalism, in a sense, is double-entry bookkeeping. And in fact, while itprobably goes back a little over 1,000 years, whenit was truly written up by the Italians inthe 1300s, it started to help Europe comeout of the Dark Ages. I mean, the commercialRenaissance of the Middle Ages, some would say, was in part– not entirely, but in part– on the backs ofdouble-entry bookkeeping. So ledgers matter is my point. They’re not going to be theheart and soul of this class, but Bitcoin, which is atransaction ledger, Ethereum, which is a balance ledger,our financial system, which is all set up on ledgers isa relevant sort of subtext. You don’t have tobe afraid of it, just as you don’t have tobe afraid of hashing power that we’ll be talking abouton Thursday and cryptography.You have to have some sortof basic sense of where does Bitcoin fit in,in terms of ledgers. I didn’t feel this slide in. You’ll find out it’s blank. Does anybody wantto tell me what are some characteristicsof a good ledger? Because again, as you startto think about your blockchain projects later inthe semester, it’s like, what makes a good ledger? I don’t have any answers here.AUDIENCE: The bitcoinwere immutable. PROFESSOR: So you want itto be immutable, maybe. Thalita can you do mea favor and keep these? We’ll put them on the slides. We’ll keep the class’s list, andwe’ll put them in the slides. Immutable, I like that. Anybody else wantto grab something which is a good ledger? AUDIENCE: Time stamped. PROFESSOR: What’s that? Time stamped, allright, so that you know when you made your entry. Kelly? AUDIENCE: Ownership. PROFESSOR: Ownership. What do you mean by ownership? AUDIENCE: Essentially, thereceiver and the person giving. So essentially, who’s takingwhat and who’s giving what. PROFESSOR: So ifthere’s a transaction, the two counterparties tothe transaction, right? And if it’s a balance,then who owns the balance? I was just adding a little bit.Let’s see if we havea new name or face. Back here, on the back table. I haven’t chatted with you yet. AUDIENCE: Ross. PROFESSOR: What is that? AUDIENCE: Ross. PROFESSOR: Ross. Thank you, Ross. Good to meet you. AUDIENCE: Pleasureto meet you, as well. Accuracy. PROFESSOR: Accuracy. So Ross says accuracy. And can we take oneor two more, just to– AUDIENCE: So a descriptionof the transaction. PROFESSOR: Andrew says adescription of the transaction.And last, Mr. [INAUDIBLE]? AUDIENCE: Comprehensive. PROFESSOR: What’s that? AUDIENCE: Comprehensive. PROFESSOR: Comprehensive. So all good attributes of a– characteristics. Somebody’s burning desirethat we missed one or two? Jihei? All right. AUDIENCE: I just was curious. Consistency, maybe? But I don’t know if that’s– PROFESSOR: Consistency. Well, I think that’s inside ofimmutability, that, in essence, that it’s valid, thatyou can’t change it. You can’t counterfeitit and the like.And what you’ll findis the characteristics of a good ledger isalso, in some part, similar to thecharacteristics of good money. They’re not identical,but they overlap a lot. Payment systems– I’m justgoing to say one line about it. It’s a method, basically,to amend and record changes in a ledger for money. I know it’s not what you usuallythink about a payment system. But if you go into Starbucksand buy a cup of coffee and use your cell phone,aren’t you really just amending a set of ledgers? Starbucks’ ledger goes up, andyup, your ledger goes down. Well, your monetaryledger goes up. Your utility, your fulfillmentfrom that latte might go up. I’m talking aboutthe financial ledger.So I just wanted to ground–when we talk about payment systems, think about it’s reallyjust a way to amend, usually, two parties ledgers’– onegoing up, one going down. Now, in an earlier time, it washanding somebody a bit of gold or a bit of silver,and it was not recorded on central ledgers. But we already live inan age of electronics, so this is really what apayment system largely is. It’s not entirely. There’s still some otherways to do finance. So what were some earlyforms of payment systems that did just that, thatmoved and changed ledgers? They’re callednegotiable orders. I would dare saythat most of you probably have not usednegotiable orders of withdrawal that much in the lastweek or the last month. Has anybody herewritten a personal check in the last week? But in an earlier era, it wouldhave been the whole class.Anybody in the class noteven have a checkbook? 3/4 of the class. Larry, how’s that make you feel? AUDIENCE: Old. PROFESSOR: But acheckbook is, in essence, with a– what doyou put on a check? This is all about Bitcoin now. I’m not doing thisjust as a walk down memory lane forLarry and myself. What are the important piecesof negotiable order, withdraw, or a check? AUDIENCE: Signature. AUDIENCE: Put yoursignature on it. PROFESSOR: Sothere’s a signature. What else is there? I want to get to peopleI haven’t talked to. In the back. I can’t remember your name. AUDIENCE: Me? I’m Dana. You put who you’re paying to,how much, and what it’s for. PROFESSOR: All right,so there’s a bunch. So a signature, a payee, howmuch, and what it was for. What else? AUDIENCE: There’s an accountnumber and routing number. PROFESSOR: Account numbersand routing numbers.So think about it. Account numbers androuting numbers is to say, in essence, what ledgeris this coming from? And the payee is theledger to whom it’s going. And I’m sorry, Dan? AUDIENCE: Also adate, and a day. PROFESSOR: So there’s atimestamp, a signature, a payee, the payor in theform of the account number, and an amount. Those five are reallycritical, and you’ll find them all are going tobe right in the middle of all this Bitcoin. And then the reason why you’re– you know, someother information. I’m sorry, was theresomething else? AUDIENCE: Kyle. PROFESSOR: Kyle. AUDIENCE: I justhave a question. Would you consider somethinglike PayPal or Venmo like a negotiable order? PROFESSOR: They may be.They may be new forms. They’re certainly partsof the payment system. They might not be negotiableorders to withdraw. They might not be adirect authorization for a bank with one ledger tomove money to another ledger. They might be movingit on their own ledger. You’re asking theright question. So some early money that wealready talked about that was ledger wherethe tally sticks in England and the Yap stone. These were ledger typesand forms of money and was kind of interesting. So ledgers didn’t just comewith electricity and computers. So now let’s get back tofiat currency, the heart of the earlier question. We already talkedabout it, so let’s see how the professor did,because you already said some of the things thatyou said were fiat currency.One, social andeconomic consensus. I’m in the school that it’sjust part of the history. It’s not that differentthan everything that came, even though it built on thatpromissory note from China 700 years ago and the privatebank notes and the goldsmiths in the 1700s. But ultimately,governments took control. It represents centralbank liabilities, and that’s important. It’s a liabilityof a central bank. It’s not an asset. It’s their liability side. But it’s also– guess what? There’s a second form of money. And that’s whenyou have a deposit in a bank, that’s a liabilityof a commercial bank. Central bank is the topgold standard, in a sense.Using the word gold,but it’s the top ledger. Commercial banks are likesubledgers, in a sense. Please, Alan? AUDIENCE: Sure. I’m not an economistor anything, but what does it meanfor a coin or a note to be a liabilityof the central bank? What does that actually mean? PROFESSOR: So beforeI answer, does anybody want to try toanswer what it is? Eric? AUDIENCE: Liability is basicallyan obligation to, in this case, pay someone an amount. PROFESSOR: So becauseit’s a social consensus, it’s a very good question thatAlan asked, is what does it mean to be a liabilityof a central bank when it’s just the currencyin our pocket, right? This Federal Reservenote, this says Federal Reserve note on it. We can pass it around. I’m not afraid. It’s only $1. Right? If you want me to pass around20’s, then I want them. But it says FederalReserve note, right? So it’s a liability ofthe commercial bank. In an earlier day, itsaid you could exchange it for gold or silver.AUDIENCE: Right, so that’swhat I don’t understand. PROFESSOR: By the 1930s,for retail deposits in the middle of theDepression, President Roosevelt said, no more. You cannot redeemgold and silver. And then PresidentNixon, in the 1970s, said in the official sectorthat he was going off of the– until that point intime, other governments could redeem in gold. But when paper money started,it was not backed by gold.We had a period ofthe gold standard. We were on and off of it. We fell off of it during WorldWar I. We went back on it. It would be a falsenarrative to say that we were on the goldstandard for our first 140 years. I just wanted to clear that up. I mean, we sort of went on thegold standard, we went off, we went back on, and so forth.But it is a liability onthe books and records. So it is a matter of accountingin double-entry bookkeeping. I will show you ina minute the balance sheet of the FederalReserve, and I’ll come back to this question. Is that all right? AUDIENCE: Can you clarifywhat is the bank liable for? So before, it gave me$1, and I could go to $1 and get back the gold, right? PROFESSOR: Right. AUDIENCE: Now, what arethey liable for now? PROFESSOR: It is, inessence, a social– it’s the first point. I’m going to separate it. The central bank is liable thatthey will move on its ledgers if you want to movethat to somewhere else. So you could take thatphysical $1 in and say, I want to depositthis in a bank.And they have to record iton the ledger of that bank. That is what they are– and the US government,which is technically separate from the central bank– or the UK government orthe Chinese government. they’re all technicallyseparate from their banks– People’s Bank of Chinaor the Bank of England. Their governments aresaying they will accept it for payments against taxes. So there’s a set ofsocial constructs. I’m going to just go throughthis to answer your question. It relies on asystem of ledgers, and it’s an integration of thoseledgers between the banking system and the commercial banks. In the US, we have about9,000 commercial banks. And what the FederalReserve is saying– but it’s true about thePeople’s Bank of China.It’s true about theEuropean Central Bank. Each of these centralbanks are basically saying, if you bringyour paper money in, we’ll record it on theledger of a commercial bank. And you can pay yourtaxes to our sister over here called the government. I’m sorry to let you down. It’s not more than that. Sorry, Alan. AUDIENCE: I have apotential answer.I might be totally wrong. PROFESSOR: Please, no. AUDIENCE: I think it’s alegal and sustainable way to conduct a Ponzi scheme witha proper Ponzi scheme, where the value willincrease by 1% to 3% if the central bank reachesthe goal of inflation. PROFESSOR: All right, anyother points of view on that? I saw– I’m notsure of your name. Oh, no, you don’twant to say anything? No? All right. AUDIENCE: I think I’llgo back to point one. It’s a construct that someonewould give you something. So your dollar with thecentral bank, the central bank owes you that dollar’s worthof whatever you desire. And someone willhappily take that dollar from the central bank and giveyou the goods that you want. So it’s a roundaboutway of– it’s a way of transacting something,whatever value that dollar has. AUDIENCE: It’s alsocentral bank liability, because whenever thegovernment has sovereign debt, it can’t just issue new notes. It’s liable. So that’s why it’s aliability, because you can only issue notes against acertain amount of reserves that you carry.So that’s why you referto it as a liability. Because you can’t just issue newnotes whenever you need them. You can’t just make newmoney out of thin air. So you’re liablefor every new note. PROFESSOR: I’m going to takeone more comment on this and then give acouple more things. Eric? AUDIENCE: Thecurrency is actually a small part of the totalreserves of the Federal Reserve System.I think maybe the bankreserves are maybe a more applicable application,because a bank can actually require the Fed to printmoney by making more loans. So in that way,there’s this mechanism to ensure thatliability [INAUDIBLE].. PROFESSOR: I’m very pleasedwith this discussion, even Alan’s contributionsabout the schemes. This is the debate. If Jay Powell werehere– how many of you know who Jay Powell is? Who’s Jay Powell? AUDIENCE: It’s a lab. PROFESSOR: Jay Powell. No. Who’s Jay Powell? AUDIENCE: Head ofthe Federal Reserve. PROFESSOR: Head ofthe Federal Reserve. Thank you. Sorry. But if Jay Powellwere here, he’d have a laugh along withwhat Alan just said, but he would say,also, the liability is a social liability, as well. That a centralbanker, to their core, believes what theyare trying to do is ensure for the stability ofthis social thing we call money and to make sure thatit doesn’t get debased and it has some value.So it’s accepted fortaxes, we talked about. Notes and coins are legaltender for all debts, public and private. I walk into a Starbucks and Isay, I’d like a cup of coffee. Here’s my $5 or whateverit costs these days. Does the personbehind the counter have to brew the coffee? Is just a yes or no? Can I see? Who wants to go for it? There’s a no from Christopher. What, Chris? There’s a no from Chris. Who agrees with Chris? OK. They brew a cup of coffee. I go to the otherside of the counter. The coffee’s sitting there. Now, do they have toaccept my $5 at that point? Yes.Before they brew the coffee,nobody has to take dollars. But once a debt is established,they’ve produced the good, they’ve provided the service,they have to take it. Just a small, little thing. That’s what legal tender is. And so there’smany establishments around the globethat are basically now putting little signs out,we don’t take Swedish krona. We don’t take this. We don’t take thatin paper form. They’ll still takeit electronically. And there’s a new littlebit of definitional thing going on about legal tender. There’s also someunique tax treatments, but I’m not going to gothrough the currency. So central banking and moneywe talked about a little bit. This is a kind ofchart that I borrowed from somebody else’s paper. But the central banks atthe top is at the center. And if Alice and Bob– and we’llbe talking about Alice and Bob in Bitcoin time, so you canpull this chart down later– want to transact and they’reat the same commercial bank, Bank Number 1, thencommercial Bank Number 1 has to change their ledgers,moving money from Alice to Bob.In essence, if you’re bothtwo people at Bank of America, you can move your balanceat Bank of America. But if you’re at Bank ofAmerica going over to Citicorp, then something has to go betweentwo ledgers, Bank of America’s ledger and Citicorp’s ledger. And the only way to transactbetween two banks’ ledgers is some balancingact has to happen at the top ledger,called the central bank. And later, when we talk aboutpayment systems– and I’m going to use this slideagain later in the semester. That’s why I’m not going tospend as much time now on it.We’re going totalk about ledgers. And when you move moneybetween two banks, it’s all withinone closed system– that country’s or that society’scentral banking system. But then it gets reallya little bit more iffy and woolly when you’removing from one currency to another currency. Because how do you make twoclosed ledger systems operable? Not for today, butwe’ll go through that later when we dopayment systems and the like. The central bank, theUS central bank– this was the only good slide I couldfind, which was about a year old. Its liabilities and assetsare about 4 and 1/4 trillion dollars, $4.3 trillion. $1.7 trillion ofthat is in currency. Do I get my $1 back, by the way? I mean, my liability. So $1.7 trillion of thosegreenbacks are in circulation. And remarkably, eventhough half of you probably don’t use cashthat much, you don’t even have checking accounts, theamount of cash in circulation is growing fasterthan the economy in most developed nations.Why do you think that is? What probably one word? AUDIENCE: The amount of2008 crisis [INAUDIBLE].. PROFESSOR: Oh, that’smore than one word. AUDIENCE: Trust. PROFESSOR: Drugs. AUDIENCE: Trust. PROFESSOR: Oh, trust. I thought you said drugs. Trust. Well, it does haveto do with trust, but it also hasto do with drugs. Paper currency isa wonderful method of money laundering, drugrunning, and a store of value. So there’s certain segmentsof our economy and segments of the worldwideeconomy that does not want to be in theelectronic banking system.I’m going to slipthrough these quickly, but there’s another piece thatwe need for this whole class and for the semester is creditand credit intermediation. But just a little thing– credit cards startedonly 60 or 70 years ago, but they go back to a booka little over 100 years ago. The word “creditcard” is used 18 times in this book, where a sciencefiction writer in 1887 said, what would the world belike in the year 2000? And it was the first useof the word “credit card.” And he said that societywould have a form of money, and you would havecredit against it.And it’s a fascinatingthing that somebody could be that visionary. But there were merchantcards starting, so maybe he wasn’t so visionary. Oil companies in the 1920s,charge cards were starting, but they weresingle-merchant cards. You could have creditfrom that merchant. In 1946, in a bankin Brooklyn, a guy named Biggins started with that. That was the firstreal charge it. You could charge things in afew dozen places in Brooklyn, literally. And then, all of asudden, it took off. Diner’s Club startedin the early 1950s. They found that they could geta bunch of restaurants to say, wouldn’t you want to extendcredit, and we’ll back it? American Expressin the mid-1950s. And then, finally,in the mid-1960s, Bank of America, which at thattime was a California bank, figured out they wouldcreate a co-operative with a bunch of other USbanks to extend credit.And the credit boom took off. And what was interesting,the laws to regulate all this didn’t come until the1970s, at least in the US– the Fair Credit ReportingAct and all the other laws. There’s three bigones in the 1970s. I go to conferences sometime andtalk about Bitcoin regulation, and they say, well, why can’tthe government solve this now? I sort of remind them thatit took 15 to 20 years from the introduction of credit cardskind of in the early to mid 1950s and the realtake-off in the 1960s– it was 1974, 1970, ’77,the three big credit laws.So if you’re going to bean entrepreneur in Bitcoin, know that it could be15 years until there’s some cryptolaws in the future. That was the processingmachine from the 1950s. I made it too small, sorry. Visa made it better. And then, of course, that’swhat we all see today, how your cards get processed. So the role of moneywe’ve talked about. So I’m going to skip over that. But now thecharacteristics of money. What makes a good money? We talked about someof this earlier. It’s durable, meaning that thatsalt cube wasn’t the greatest, because if a lot of raincame, that would wash away.Gold and silver,metals, are durable. They’re portable. The heavier it is,the less portable it is, and that’s why gold wasa better money than silver. You could move it– and better thancopper and bronze. It was divisible easily. You could slice things up. Uniform and fungible. And anyone who’s who down therabbit hole on this stuff, if you really wantto learn about money, read about Crawfordversus Royal Bank in 1749. There was a gentleman at theearly part of paper money that mailed two 20-pound notes,and he wrote his name on them. They got lost in the mail,and he took the banks to court to say, those were mine,when they were found. And there was no law in Scotlandor in England at the time as to what to do about it. But if you lose or somebodystole a piece of art, you get it back. And the law was settledin 1749 that you actually don’t get your money back.Does anybody want to guessas to why the courts– it was a matter offirst interpretation. The courts had no jurisprudenceon this before 1749. Why did the courts decidethat a piece of art was different than currency? And it goes to thefundamental of what money is, fiat money is. Anybody want to take aguess as to why the courts– they could havegone the other way. AUDIENCE: How could you tellif someone really owned money? How could you [INAUDIBLE]? PROFESSOR: He signed it. Actually, the facts were clearit was the currency he signed. I’m just helpingyou out so that– that’s a good point,but he signed it.AUDIENCE: It can’t be usedas a medium of exchange if it doesn’t belong tothe person [INAUDIBLE].. PROFESSOR: Inessence, if you were to go back and read–there’s some history on this, and read the court cases. This was the point. The court basicallysaid, we have to make this amedium of exchange, the greater social good. It has to be fungible. And the Royal Bank of Scotlandwas, of course, kind of closer to the courts thanthis gentleman, Crawford.But the banks were also saying,we can’t keep track of this. So it was a mixture of thetwo, but it made it fungible. Eric? AUDIENCE: Was itthose specific notes that he had signed [INAUDIBLE]? PROFESSOR: Yeah. Yeah. AUDIENCE: [INAUDIBLE]. PROFESSOR: And in 1749,they all had serial numbers, and they were signed ina way that not today. Of course, they’re acceptable,and they’re stable. And we’re going to talk alot about the last point. They’re stable becausethey’re hard to mine, and Bitcoin has thatembedded in it, as well. The design of money isreally important, as well.You can make it a token– a token is likesomething physical– or account based. We’re of course now living ina world of account-based money, and it’s digital, not physical. It can be issued bythe private sector, just like banknotesin the 18th century, or private sector likeBitcoin, or it can be central. It can be widely acceptableor just wholesale. There are forms ofwholesale money. One of the biggestforms of wholesale money is the central bank’sreserves are only available to thecommercial banking system. We’re going to studythis money flower later, but I put it in theslides because this– I didn’t create this flower.You have a readinglater in the semester from the Bank ofInternational Settlement that has this money flower in it. But it’s basically acrossthese four things– is it token our accountbased, physical or digital, private or central,or widely accessible? And then all monies fall intoone piece of this money flower. There’s a Professor Garrettthat came up with this flower, and there’s an optional readinglater in the semester from him. You had a reading from Clark.There’s not enough time,but all this stuff failed. Does anybody want togive me a flavor for one or two reasons why a bunchof digital cash failed? Did anybody readthe Clark reading, the history of some DigiCash? Oh, Alan read it. Anybody else read it? Over here. I can’t remember– AUDIENCE: Zhan. PROFESSOR: Don. So what did you– AUDIENCE: Zhan. PROFESSOR: What? AUDIENCE: Zhan. PROFESSOR: Zhan. Zhan, what did youtake from the reading? Why did these all fail? What’s the one or twobiggest reasons they failed? AUDIENCE: Most ofthem still relied on kind of some formof a central authority.PROFESSOR: All right,they relied on central– DigiCash certainly didit, David Chaum’s case, and some of the others. Any other big reason? Alan, did you have– AUDIENCE: There wasn’tenough adoption by merchants, I recall. PROFESSOR: Definitely notadoption by merchants. Very good. Third reason why they failed? One that’s at the coreof what Bitcoin solved. AUDIENCE: Incentivizinglike a decentralized network to keep that ledger,maintain the ledger. PROFESSOR: All right,incentivizing the ledger. Behind Eric. AUDIENCE: They couldn’t solvethe double spend problem. PROFESSOR: That’s it. Couldn’t spend thedouble spend problem. Could a currency be spentnot just once, but twice? So there’s four thingsthat were raised. Four things aboutcentralization, the double spend. They couldn’t getmerchants to adopt it, and there was couldn’t– someform of consensus as to what the ledger was. I’m going to flipthrough these quickly, but digital and mobilemoney did happen. We were asked aboutPayPal earlier.It was 1998. In Norway, Ericsson and Telenorhad the first mobile app. And it was to get movieson your mobile phone. 1999, Alipay comesalong that we’ll talk a lot about whenwe do payments later. And of course, M-Pesa that wetalked about a little last week in Kenya, where Safaricomnoticed that a bunch of money– near money. It was mobile minutes that wasbeing used as money in Kenya, and now there’s 20million users of that. And of course, there’sa bunch of regulations now and so forth. Starbucks started in 2011. And then, of course,it’s now off to the races in mobile money. One of the key thingsabout mobile money we will discussand learn together is the questioneach one of these is, where is the stored value? And I have to tellyou, sometimes I get quite confused whenI research a new app.Are they storing the value? Or are they just aprocessing provider to move– as we said earlier,payment systems move and change andamend other ledgers. In a number of these, likeM-Pesa, initially they were storing the value. And mobile apps Starbucksstores the value. But many of them are justapplications, computer code, to move the ledgersomewhere else. But the riddle remained. You remember that riddle– how to move money peer to peerwithout a central authority. And that’s what I’m askingfor next class, Thursday, to actually read.I wouldn’t wing it, and Iwouldn’t be afraid of it. Satoshi Nakamoto wrotea paper that everybody in this class– if you’reat MIT, and a few of you are at Harvard. I’m telling you,you can read it. You’ll understandmaybe 1/2 to 2/3 of it. It’s not deeply technical. And it’s only eightor nine pages. I’ve also assignedNational Institute of Science Technology, about20 pages of reading from NIST. The question iswhether that’s Bitcoin. I’m going to skip throughthe study questions, but the studyquestions are really about cryptography and howappend-only timestamping. We are going to get intothe nitty-gritty over three lectures. I couldn’t commit the wholecourse, the whole semester. But I think three lectures– Thursday and the two next week. Anytime you wantto come to see me– Sabrina is somewherehere on the floor, who’s one of our TAs, who’s a computerscience master’s student and knows moreabout all of this. Madores, who washere last week– I don’t know if Madores ishere, who’s part of the Digital Currency Initiative. Over three lectures,we’re going to try to work through what’sthe cryptography, and why does that matter? How does the timestamping happen? How’s this look like money, andhow are the transactions kept? Yes? You get to close it out, almost.AUDIENCE: Can you justanswer the question posed about the longestrunning blockchain? PROFESSOR: I can answerthat, but the assignment was to answer itby Thursday, right? AUDIENCE: Oh, Thursday. OK. PROFESSOR: So by Thursday. What’s your first name? AUDIENCE: Caroline. PROFESSOR: Caroline. Did I say I was goingto answer it today? AUDIENCE: [INAUDIBLE]. PROFESSOR: Oh, did I say today? No, is there a mutablerecord of what I said? I’ll answer it now if you want. Does anyone have theanswer in the whole class? AUDIENCE: Yeah. It’s a service calledSurety that Gillespie begun working in1995, was a timestamp service for digital documents. And the way they didit was use a hash function to create a seal witha timestamp on the document. And then present theweekly batch of seals. And they actually publishedit in the New York Times [INAUDIBLE].PROFESSOR: So Caroline, it’sgood to raise the question. I thought it was forThursday, but thank you. Stewart Haber, acryptographer, and a colleague at Bell Labs in theearly ’90s, said, how do we notarize information,digitally notarize? And we’re going to be talkingabout this Thursday a lot. They used a cryptographicmethod called hash functions. And they were just tryingto notarize information. And by 1995, they took– they were entrepreneurs. They created acompany called Surety. And once a week, they published,in the New York Times– and they still do it. You can get a New York Times– I believe it’s onSaturday or Sunday.And they take– it’s inthe classifieds section. And they have the hash function,which you’ll read about between now and Thursday. They have the hash of allthe pre-existing information. And so they timestamp it byusing the New York Times, and they use cryptography. And it’s currently23 years in running. AUDIENCE: So that’sthe longest in terms of time, not the longest withhow many ledgers or how many– PROFESSOR: Correct,because Bitcoin is about 550,000 blocks,and this would be whatever 23 years times 52 is. Longest in time. Thank you. I look forward to seeing you.