What is the money supply?
If you ask this question of most cryptocurrencies you get the same answer. The supply of the currency is determined by algorithm. With some cryptocurrencies — the Permission Token and Ripple are examples — the money supply is fixed from the get go. When that’s the case, the currency is said to be “pre-mined.”
So for crypto, either an algorithm determines the growth of the money supply, or it is fixed at birth. This is not the case with National currencies or “fiat currencies” as they are often called.
In case you didn’t know “fiat” is Latin for “let there be.” According to the Old Testament the first recorded words of God were “fiat lux” (let there be light). The label “fiat money” is not a sarcastic term that emerged from the crypto community, but an Americanism dating back to circa 1870–75 pointing out that paper money has no intrinsic value.
This is the defining difference between cryptocurrencies and all other currencies. The money supply of a cryptocurrency is fixed and immutable. With all other currencies, including gold, the money supply is not fixed and immutable.
Some people have a deep faith in gold as a currency because the supply and its destruction (through loss and industrial use) is roughly the same and has been for a few centuries.
However when the Spanish filched the Aztec and Inca gold, the supply of gold in Spain grew dramatically. There was gold-provoked inflation.
If new highly productive gold deposits were discovered at the bottom of the ocean or on a mineable asteroid or wherever, it could happen again.
With crypto, the money supply is publicly displayed on a bullet-proof blockchain. It cannot be manipulated. The crypto money supply is thus easy to understand. With fiat currency it is not, as we shall see.
What are Notes and Coins?
Most money is not paper
When we speak of the fiat money supply there are four species; usually labeled M0, M1, M2, and M3. They live inside each other like Russian dolls.
The nature of M0
The first of these, M0, is the easiest to understand; it is the coins and notes in circulation. This is what most people think of as money because you can touch and see it.
Most fiat money of this species. In the US such money accounts for about 8.3% of the dollars in circulation. It’s the same for most other currencies.
Curiously there is no equivalent of this kind of money with a cryptocurrency. This kind of money is “bearer money.” If you carry it, you own it. Nothing about notes or coins enable you to prove ownership.
Cryptocurrency is always held in a wallet and belongs to the wallet owner. Muggers cannot steal it from you.
Of course, hackers can steal it from you and fraudsters may find ingenious ways to lay their hands on it, but in either case it will be because you took insufficient care of it — you allowed it to be vulnerable.
Paper notes and coins can be lost or destroyed. And that too is the product of carelessness.
Ragged, worn and torn notes
Paper notes wear out, provoking the mint to renew them with pristine replacements. Different denominations have different life times.
- $1 note — about 5.8 years
- $5 note — about 5.5 years
- $10 note — about 4.5 years
- $20 note — about 7.9 years
- $50 note — about 8.5 years
- $100 note — about 5.5 years
To make money, you have to spend money. The perpetual printing activity costs about 5 cents (for $1 and $2 bills), about 10 cents (for $5, $10, $20 and $50 bills) and 12.3 cents for benjis.
It doesn’t sound expensive, but for every $1 bill it costs ¢1 to keep it in circulation and for a year, and as there are 11.7 billion such notes, were looking at over $110 million per annum just for $1 bills.
With cryptocurrency, there is no equivalent cost, and perhaps that is an advantage — or perhaps it is not. Paper money does not require electricity. It can be used when your battery dies.