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LeoGlossary: Ghost Money

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Ghost money is that which is created via ledgers. It is not done by banks or governments. Instead, it is private credit issues by individuals, typically merchants.

This starting with the development of double entry accounting which introduced the liability to the balance sheet. It was this development that enabled the growth of the powerful banking houses in Europe throughout the 17th-19th centuries. These entities understood the value of credit tied to a ledger.

The adoption of these practices of ledgers with current accounts meant that many of the problems associated with paying cash was eliminated. Transactions were settled in currency everyone accepted.

What this did was to present a standard of value (unit of account), which meant settlement penetrated easily. In the earlier centuries, the store of wealth was still ledge to the silver and gold coins.

Each time a merchant used credit (ledger) to conduct business, money was generated. Here is where ghost money took on a massive role in the economic activity throughout the centuries, especially in Europe.

There were handicaps to cash which people typically overlook:

  • coin availability (look up Great Bullion Famine)
  • fluctuation in coin weight (inflationary in nature since people shaved pieces of the coins off)
  • standard of value as a means of settlement absent
  • no common currency in trading centers meant unit of account impossible

Like blockchain, Ghost Money allowed people to switch between currencies without financial intermediation. With standard of value and means of settlement in place, this was always available. There were never any shortages which is often experienced with bank and government money (regardless of the form that is used).

Ghost money is private money developed by business people to fill needs and enable them to trade. Whenever there is a monetary obstacle, merchants figure out a way around it. This is what business does.

This was the most common form of money in the Dutch Age (1500-1800). The elasticity of Ghost Money allowed for it to expand and contract based upon the economic and business needs of the area. It removed the dependence upon the official entities to properly assess how much money (coinage) was going to be required.

Digital assets, while in the early stages, hold great potential due to this same idea. Here we are looking at cryptocurrency which can be created as needed by business communities. The use case is still rather limited but when commercial applications start to apply this form of money, it could spread rapidly.

It is simply a digital evolution of something that took place over the last 600 years. Distributed ledger technology removes the ledger from the hands of individuals and places it on decentralized node system.

FinTech continues to bring new innovations to money, simply updated what was in practice over the centuries.

General:

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