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Masthead Editor-in-Chief Samuel O’Brient Assistant to the Editor Caroline Belina Cover Art Annie Friedman Logo Design Matias Sanchez

Special Thanks To John Hill, Jeffery Engel, Alexander Wah, and every member of Gryphon Capital.

Contents Introduction Why Everyone Should Study Economics Samuel O’Brient

Finance The Value of Debt Cameron Carpenter Looking to the Future: Virtual/Crypto Currency and It’s Impacts Tristan Carty Talking Investment with First Reserve’s John Hill Caroline Belina Centrally Banked Digital Currency: A study of key innovations and possible economic effects of issuance of digital currency by a central bank Alexander Jermann

Economic Theory & Policy Marx on the Division of Labor: The Shift in Soviet Industrial Ideology During the New Economic Policy Nebila Oguz

Chinese Economic Policy towards Ethnic Minorities Taha Hayat

Opinion Gryphon Capital Management: A Leader’s Reflection Matthew Gerak


Why Everyone Should Study Economics: An Introduction Samuel O’Brient, Class of 2018 Like so many college students before me, I had considerable difficulty choosing a college major. I attend a college with no general education requirements, meaning we students had almost complete freedom when it came to selecting our courses. Some students enter college with a clear passion, knowing exactly what they want to do, but my college plays host to many students who are not of that variety. The majority of the students I know are incredibly smart, driven, and accomplished, but seem to prefer to take a variety of course and coast through college experimenting with many different disciplines until they find something that sticks. I certainly belong in the latter category. I’ve studied many different things, some that I’ve enjoyed, others that I haven’t. As I progress in my collegiate career, though, I am certain of one thing; all college students should study economics. When I say study, I do not mean major in, nor do I mean study extensively. I am generally not a fan of general ed requirements, but I firmly believe that a basic introductory economics course can benefit all students, regardless of their interests or career goals. Why do I saw this? It’s not for the reason that most of you are probably thinking of. My primary reason is very simple. On the first day of my first economic theory and policy course, our professor asked the class what we thought economics was the study of. Many students ventured incorrect guesses involving money, and I’ll admit that I was among them. His answer, though, seems to shock everyone. “Economics,” he told us “is the study of rational thought.” During that semester, I learned that his words were absolutely true. Much of economics has to do with rational thought and the lessons that go along with it can be applied to so much more of life than many people realize. The ability to access and think rationally is certainly important in any situation, but it should also be noted that the subjects we learn in an economics class can and should be applied to so many everyday situations. Take, for example, opportunity costs. Every time we decide to go somewhere and do somewhere, there is an opportunity cost that is often overlooked. We college students encounter this all too frequently when we choose to go to that party happening across campus or stay in and complete our paper that’s due the next day. When we worry about the job market, never is the concept of supply and demand more relevant. The best way to evaluate our chances of finding employment in our chosen field is to consider the skill set that we are supplying and then access the current demand for it in each industry. Of course,

!5 there is also the economic element of risk versus reward. If you’re considering whether or not to do that third Jager bomb, maybe stop and consider the whether the reward of your friends patting you on the back will justify the risk of being so hungover you’re unable to function the tomorrow. There are, of course, many other concepts within the field of economics that can and should be applied to many everyday situations. These are just a few that come to mind. Regardless of your field or current career goals, the ability to manage money is a skill that is vital to every industry. If you take away nothing else from an economics class, try to learn a lesson or two in that area. This mindset was a large part of what compelled me to create the SLC Economic Review, a student-run publication dedicated to publishing student work on matters involving economics, finance, or political economy. While economics may not be the most popular discipline on our campus, the students who do study it are truly exceptional, demonstrating their passion through incredible work, be it inside the classroom or out. I was first inspired to create this publication by my partners at Gryphon Capital, Sarah Lawrence’s premier student-run investment group. What began as three guys sitting around a table discussing stocks has grown into a group of over 15 students who have accomplished incredible feats, be they discovering, researching and pitching great new companies or forging connections with notable alumni and other members of the business world, among other things. This group has even become a legally recognized general partnership. In awe of the incredible men and women I was working alongside, I wanted our entire school to see the incredible work we are doing. More than that, though, I wanted all our fellow students concentrating in economics and finance to have a venue to publish the work that they were proud of. I knew that it was up to us to create one. The entrepreneurial mindset among our group members is strong and it inspires me every day. Thinking outside the box has proven to be a cornerstone of the business world and it has certainly been so for Gryphon Capital.

!6 The Value of Debt Cameron Carpenter, Class of 2019

In September of 2008, the investment bank Lehman Brothers filed for Chapter 11 bankruptcy. Nine years later, this remains the largest bankruptcy filing in United States history. At the time, Lehman was saddled with a whopping six hundred and thirteen billion dollars of debt (Mamudi, 2008). This massive investment bank was the first domino to fall in the subprime mortgage crisis, which led the U.S. and the entire world into a recession, the likes of which have not been seen the Great Depression of the 1930s. To understand how this happened, we need to understand the history of investment banking. Originally, investment banks were small, private partnerships held by wealthy individuals trading stocks and bonds with their own money. However, during the 1980s, investment banks went public, a phrase which here means that these banks began issuing stocks on public exchanges, allowing interested individuals to purchase shares in the companies. This gave investment banks unprecedented access to large amounts of capital generated by the sale of shares (Ferguson, Inside job). In 1982, the Reagan administration loosened the regulations on the entire financial sector, and allowed savings and loan companies (ordinary banks) to make investments with depositor’s money (Ferguson, Inside job). By and large, before 1982, if one were to put money in the bank, that money was not to be touched by bankers for any reason—it was illegal to use it as a source of investment capital. From ’82 onwards, however, that money was fair game, to be gambled with however the bankers saw fit. These two major changes to banking and investment banking procedure allowed seven names to come to control the entire financial world—Goldman Sachs, Morgan Stanley, Lehman Brothers, Merrill Lynch, Bear Stearns, Citigroup, and JP Morgan Chase (Ferguson, Inside job). Meanwhile, a new kind of security was being developed in the bond market division of a firm known as Solomon Brothers. A security that would one day bring the financial world to its knees—the mortgage-backed security, or MBS. Now, there is nothing inherently sinister about a MBS. In fact, it was originally developed as a safe, high yield alternative to treasury bonds, and quickly became a popular haven for retirement and pension accounts. The way a MBS works is it bundles thousands of mortgages together and allows the public to invest in them—in other words, by investing in a MBS, one is essentially betting that the mortgages that make up the bond will be paid off. The sales pitch for a MBS used to be —“who doesn’t pay their mortgage?” It was considered one of the safest investments one

!7 could make, and MBSs were rated triple A—the highest possible rating an investment vehicle could receive. Banks made fortunes in commissions selling MBSs (Lewis, 2011). However, in the 1990s, the milk from this cash cow began to run dry—after all, there were only a finite number of houses and only a finite number of people with the credit to get a mortgage. So, banks began making risker and risker mortgage loans. These came to be known as “subprime” mortgage loans (Lewis, 2011). At first brush, subprime lending seems like a good thing for lower-income Americans—banks were extending generous credit at a low interest rate to a segment of the population that lenders had traditionally been weary of doing business with. However, like everything in the financial world, the devil is in the details. While subprime loans might appear benign or even beneficial to the recipient of the capital, that is far from the case. Subprime lending is a malicious form of “predatory lending,” targeting people with low or no income and convincing them to take out a mortgage on a house they cannot possible afford to pay back, basically ensuring a default followed by a foreclosure. But why would banks care? As long as new mortgages kept getting issued, banks could continue minting new MBSs and raking in commission (Lewis, 2011). Here is where we get to the real corruption. There are establishments known as “rating agencies” that are tasked with evaluating the safety of an investment, be it a stock, bond, company, or even a government. These three agencies—Moody’s, Standard and Poor’s, and Fitch’s—are supposed to be objective assessors. These agencies should have slapped a triple C rating (indicating substantial risk) on any MBSs made up of subprime mortgages. Instead, they rated them triple A. Why? Because these agencies were being paid to evaluate MBSs by the same banks that were issuing said securities. Each rating agency knew that if they gave these subprime MBSs the rating they deserved, the bankers would take their business to one of their competitors (Lewis, 2011). In the words of Edmund Burke, “the only thing necessary for the triumph of evil is for good men to do nothing.” There is an obvious sustainability problem here—if buying MBSs is the equivalent of betting that the underlying mortgages will be paid off, and the underlying mortgages are doomed to be defaulted upon, then any subprime MBSs were doomed to be worthless a matter of years after they were issued (Lewis, 2011).

!8 In 2003, a hedge fund manager named Michael Burry was the first person, on or off Wall Street, to notice this. How? The answer to that is simple—he ignored the triple A rating accompanying the MBSs and actually examined the underlying mortgages. When he saw what was going on, Burry made one of the most brilliant moves in financial history—he bet against the success of mortgage-backed securities (Lewis, 2011). Prior to Burry, a vehicle for betting against a bond did not exist—so he made one himself. Through the insurance giant American International Group (AIG), Burry took out insurance policies, called “credit default swaps,” on several subprime MBSs—the ones he’d deemed to be the riskiest. AIG, fooled by the triple A rating on the bonds, happily obliged him. When all was said and done, Burry had set things up so that, if and when the underlying mortgages were defaulted upon, AIG would owe him a one billion dollar insurance payout (Lewis, 2011). Burry might have been the first to recognize the instability of subprime MBSs, but he was certainly not the last—by 2008, when an enormous number of subprime mortgages were inevitably defaulted upon, AIG owed a total of twenty billion dollars to credit default swap holders. Interesting to note—by the time subprime MBSs had collapsed, all of the major banks issuing these risky bonds had also purchased credit default swaps against them (Lewis, 2011). Certainly, the banks cannot be considered guilty by virtue of ignorance. They knew full well that their subprime scheme was nearing its end, and wanted to line their pockets with as much cash as they could before it all went up in smoke. These credit default swaps, however, did not come close to reimbursing the money the banks lost when thousands of subprime mortgages were defaulted upon. Some institutions, such as Lehman Brothers, collapsed under their massive debts and declared bankruptcy. Others, like Goldman Sachs, were rescued from their folly by the treasury department of the federal government, which spent seven hundred billion dollars bailing out banks that were in crisis due to excessive subprime lending (Ferguson, Inside job). It is important to remember that it was the American taxpayer who paid for the banks’ carelessness and greed, not the bankers themselves.

!9 References

Ferguson, C. (Director). (2011). Inside job [Film]. Lewis, M. (2011). The Big Short: Inside the Doomsday Machine. New York City, NY: Norton & Co. Mamudi, S. (2008, September 15). Lehman folds with record $613 billion debt. Retrieved April 25, 2017, from http://www.marketwatch.com/story/lehman-folds-with-record-613-billiondebt?siteid=rss


Looking to the Future: Virtual/Crypto Currency and its Impacts Tristan Carty, Class of 2018 The Italian Renaissance of the 14th to 16th centuries was an era of paramount social, cultural, and technological change. As a result, this period permanently changed the course of economic development across the board. The rise of the Medici family in Italy during this period brought about the beginnings of today’s extremely centralized economic systems. For the first time since the Renaissance, however, this centuries old economic structure is being challenged, and once again as a result of technological innovation. The rise of virtual/crypto currencies, namely Bitcoin, have brought a challenge before conventional wisdom and the current global economic structure. As with almost all forms of major structural economic change, central banks by and large are very skeptical and resistant to these new currencies and the changes that they hope to bring. The formation of virtual currencies stems from a group of programmers who follow the libertarian ideology. They believe that governments and their central banks have allowed for the creation of an extremely inefficient financial infrastructure. In a world in which “DIY�1 is becoming more and more popular, one also observes the decentralization of many economic sectors. One paramount example of this is energy, in which we now see individuals powering their own homes. The world today is certainly trending towards decentralization, and this group of crypto-anarchist/libertarian programmers see no reason for the current financial infrastructure to remain centralized. This group observed the failings of modern financial institutions during and after the 2008 financial crisis. They responded by attempting to create a monetary system which, at least in theory, is wholly decentralized and has no need for interference from governments or financial institutions. This group hopes to create a world in which another financial crisis with the breadth and magnitude that the 2008 financial crisis had could not occur. Their goal is to effect great changes in the structure of our global economic system. Accordingly, this paper seeks to investigate and shed some light upon a number of questions: First, what are virtual/crypto currencies and how do they work?; Second, are bitcoins considered currency by modern economic standards?; Third, what are the economic implications of virtual currency?; Fourth and finally, how likely is it that virtual currencies


Do It Yourself

!11 will actually affect major structural changes in our global economic system?2 Overall, virtual currencies, namely Bitcoin, have a vast potential to affect change in our current global economic system on the macroeconomic level, whether or not they do in fact affect change is dependent on social and cultural changes that cannot be easily forecasted.

I. Virtual Currencies: What Are They and How Do They Work? Bitcoin3, is an “online communication protocol that facilitates the use of a virtual currency, including electronic payments” (Bohme et al., 213). The way the system is structured, without delving too deeply into the technical aspects of it, is relatively straightforward. The online system conducts payment transactions through the internet like many other payment services. The system itself is supported and all transactions are recorded and verified by its users (otherwise known as a peer-to-peer network). Instead of having an account at a bank, users simply download a virtual “wallet”(where all of their bitcoins are stored, similar to a physical wallet with cash) either onto their smartphone or computer and are assigned an entirely unique ID number with no name, social security number, address, or any other information that banks normally require in order to open an account. All one needs to send and receive bitcoins is a computer or smartphone with access to an internet connection, thus owning a computer with internet access is advisable but not required. Much like when a bank “clears” (verifies) a transaction when one purchases a good with a debit card, when one sends bitcoins to another person or makes a purchase, other users, known as “miners” fulfill the bank’s role as the “middleman” and use the bitcoin block-chain technology (which uses complex algorithms) in order to verify that the person who is sending the bitcoins actually has the funds available and the person or firm intended to receive the funds actually receives them. The record of these transactions is stored on every single computer that is used to make bitcoin transactions and is also publically available online, one can trace the transaction history of any individual bitcoin back to its original minting (Kelly, 10-13). Both Bitcoin and bitcoins are of interest to economists due to their potential as a “disruptive technology”. Much of the current literature believes that Bitcoin has the potential 2

It should be noted that while there are many virtual currencies, this paper will focus primarily on Bitcoin,the largest and most well known virtual currency at present. While other virtual currencies should certainly not be discounted, the literature examining the issues and questions that this paper seeks to address primarily cover Bitcoin. 3

This paper will discuss Bitcoin much like the much more technical computer science literature. When “Bitcoin” is written with a capital-B it is referring to the system as a whole, while “bitcoin” with a lowercase-b refers to the unit of account.

!12 disrupt not only current standard payment systems but also monetary systems as a whole (Bohme et al., 214). Through the Bitcoin system, bitcoins can be used in order to purchase goods entirely anonymously since no form of identification is required to use them in transactions. Moreover, since the “miners” are verifying all transactions, banks and credit card companies do not have to act as “middlemen” and charge fees for their services. Hence, using bitcoins instead of contemporary payment systems saves the consumer some money in the process of domestic transactions and a substantial amount of money when conducting international transactions. Merchants also see a massive cost savings via accepting bitcoins because they do not have to pay credit card fees (Aratari et al., 2015). Thus, there is an incentive for both consumers and firms to use bitcoin instead of the current payment systems in order to conduct transactions. The mining process itself is relatively simple. The first miner to provide the correct answer to the complex mathematical puzzle (and thus verify a “block”4 of transactions) is rewarded with a certain number of bitcoins. When the Bitcoin software was first released, the number of coins a miner received was 50 bitcoins, now, however, the reward is only 25 bitcoins. This is due to what those in the bitcoin community refer to as the “halving”5 (Kelly, 82). This halving allows for the release of the currency at a controlled pace. The issue with mining is that the marginal costs of the equipment required to successfully mine bitcoins increases over time. As the demand for bitcoins increases, more and more people purchase the equipment necessary to become a miner, hoping to mine bitcoins and sell them on the currency markets. The Bitcoin software, however, increases the difficulty and complexity of the mathematical puzzles that miners need to solve as more people become miners and start connecting to the bitcoin network (Kelly, 83) This ensures that the amount of bitcoins mined is both stable and controlled. This inherently means that miners see diminishing marginal returns on their investment in the capital to mine bitcoins and they see exponentially rising opportunity costs. The question then becomes, why do the miners spend their time and money in order to purchase the equipment and electricity to mine? As noted above, this is because the process of mining is how bitcoins are created, and this is how the supply of the currency is controlled. Each time miners verify a transaction by having their computers solve complex mathematical puzzles they are rewarded with bitcoins, on average a miner, or more likely a 4

“Block” is the term used to describe a certain number of transactions that are grouped together in order to be verified all at once. 5

After 210,000 blocks are verified by miners, the amount of bitcoins rewarded for successfully solving the mathematical puzzle and verifying the group of transactions is cut in half.

!13 mining pool, is rewarded with 25 bitcoins every ten minutes6 (Aratari et al., 2015). As the difficulty of these mathematical puzzles increases, however, miners are being forced to work together in pools in order to successfully be the first group to verify a block of transactions. This means that when a pool does receive the reward of 25 bitcoins, it is forced to split the reward amongst hundreds, in some cases thousands, of miners. Thus the profitability of bitcoin has decreased substantially and will continue to decrease as the reward is divided in half. (Kelly, 84). The last important question to address is where bitcoins derive their value from. Scarcity is a necessary requirement in order to properly ascribe any sort of value to any form of currency. Scarcity keeps the growth of the money supply stable and aids in facilitating price stability. It also, at a more micro level, prevents the counterfeiting of money. In today’s world, where the vast majority of monies are held in electronic forms, this scarcity is preserved by the enforcement of legal sanctions by a multitude of institutions that ensure the accuracy of bookkeeping records. This is an arrangement otherwise known as the electronic financial system, in which a transaction triggers a credit for one account and an equal and opposite debit to another account which is verified by central banks around the world. Furthermore, central banks can exercise, with at least some precision (though how much precision is a topic of intense debate), control over the total amount of money in circulation, also known as the money supply (Bohme et al., 215). With this in mind, Bitcoin is the first and most widely utilized mechanism to deliver absolute scarcity of a money supply. Since there is no central authority that oversees the distribution of and tracking of bitcoins, the process of both issuing currency and verifying transactions becomes much more difficult than it is at present using traditional fiat currency. At the same time, Bitcoin issues currency at a very deliberate and controlled pace to its miners, which provides an incentive for the miners to maintain its bookkeeping and transaction verification systems (Bohme et al., 215). While this elaborate system is brilliant in its design and is certainly a major technological innovation in regards to payment systems, the system does not guarantee that bitcoins can do what they are intended to do, which is to function as a proper currency, with hopes of one day disrupting the existing banking and payment systems. In the following section this paper will attempt to partially answer this question by posing the seemingly simple question: Are bitcoins a form of currency? II. Are Bitcoins a Form of Currency? 6

This sounds much easier and much more rewarding than it actually is. While the technical details of this process are very interesting, they are beyond the scope of this paper.

!14 Many have posed the question as to whether or not bitcoin is a currency. In order to answer this question, one must define what makes something a currency. The first quality that a currency has is that it must act as a medium of exchange. This essentially entails that a buyer gives a seller money, and in exchange the seller provides a good or service. Without a properly functioning medium of exchange, an economy would have to operate under a barter system, much like the German economy in the 1920s due to hyperinflation. The second quality is that a currency must also act as a store of value. This implies that even if one decides to hold on to the currency for an extended period of time, the currency can still be exchanged for goods and services at a later date. This is why money is considered the most liquid asset, you can always go to a store and use money to make a purchase. The third and final quality is that a currency must also act as a unit of account. Goods, services, and assets are very often assigned a monetary value even if they are not being bought and sold. When a municipality assesses the monetary value of a home even though the owners are not planning to sell it, or when firms estimate the value of unsold goods in their warehouses in order to calculate their profits or losses, money is being used as a unit of account (Goodwin et al., 587-588). This is now a question of whether or not bitcoins embody these three qualities. Bitcoins partially act as a medium of exchange; bitcoins can be used to make purchases of goods and services from a variety of retailers. These retailers include but are not limited to: Microsoft, Dell, Overstock, NewEgg, TigerDirect, Air Baltic, Air Lituanica, and Cheapair.com. Furthermore, this list continues to grow as more and more retailers begin to accept bitcoins as a form of compensation for goods and services, it is a virtuous cycle (Coindesk, 2015). As of right now, however, bitcoins are not accepted universally as a legal tender. Thus, while one can purchase some goods with bitcoins, they cannot purchase the same variety of goods that they could purchase with a fiat currency. Bitcoins partially act as a store of value. The Bitcoin software was released in 2009, and since then it has certainly retained its value, bitcoins that were minted in 2009 are still in circulation and are being used for transactions today. While the price and value of bitcoins have been volatile, it is impossible for a currency that has its supply determined exogenously by an algorithm to be as stable as the traditional fiat currencies observed in the world today. People often to try to forecast the future value of the bitcoin by trying to predict the behavior of its algorithm, which makes it very attractive to speculators. Hence, the price will inherently be more volatile than a traditional fiat currency (Krawisz, 2015). By Goodwin’s definition, however, bitcoins are a store of value, as they do hold a value over time, though that value may fluctuate more than one’s average fiat currency. To further this point, a gentleman in Norway invested $27 dollars into bitcoins in 2009 when they were first minted,

!15 buying about 5,000 bitcoins. He ended up forgetting about them soon afterwards, but the vast media coverage of Bitcoin that occurred in 2013 reminded him of his investment, which had now grown from just $27 dollars in value in 2009 to roughly $886,000 dollars in 2013 (Gibbs, 2015). One could argue, however, that Goodwin’s (2014) definition is weak. In pragmatic terms, bitcoin is not a sound store of value. While bitcoins have certainly held value throughout their relatively brief existence, that value has been extremely volatile. As Tillier 2015 notes “The volatility that we are seeing, however, when taken as a whole, could easily steer bitcoin away from what I believe to be its true function, that of a currency rather than an investment”. Casey (2014) furthers this point “Detractors will rightly argue that householders won’t save or transact in a unit of exchange whose value fluctuates wildly. Indeed, while bitcoin transactions continue to rise, and even though a growing list of merchants accepting bitcoin now includes Microsoft, Expedia and Dish Network, digital currency’s portion of global commerce remains minuscule.” As such, while bitcoins may technically fit the definition of a store of value, there is still much to be desired pragmatically. Lastly, Bitcoin only partially acts as a unit of account. Its function as a unit of account is derived primarily from its function as a medium of exchange. Even though retailers are accepting bitcoins in exchange for goods and services, they very often, sometimes immediately, convert their bitcoins into fiat currency due to fear of price volatility. In fact, all of the retailers that accept bitcoins as a form of payment list their prices denominated in fiat currency rather than bitcoins, part of the reason for this can certainly be attributed to the its price volatility (Lo and Wang, 10). Are bitcoins a form of currency? They are a strange hybrid, embodying all three of the qualities necessary to be a currency, yet not embodying the each individual quality in its entirety. The way that bitcoins function and operate is something relatively new, that the world’s contemporary institutions are still trying to grapple with. Regardless, it is certainly being recognized, in 2014, the IRS deemed Bitcoin a “convertible currency” that functions as a “medium of exchange, unit of account, and/or a store of value” (Leger 2014). Proponents of bitcoins argue that being recognized by the IRS is a remarkable achievement for this new system, but one could argue that this move by the IRS was primarily a pragmatic one. It is likely that the IRS designated Bitcoin a convertible currency with the intent of being able to track laundered money and to be able to collect tax revenue on capital gains and other revenue streams. Regardless, Bitcoin does not operate in the same way that fiat currencies do.The way the currency operates, how it fits into the standardized “required” qualities to be a currency, and how we have come to define those qualities are all paramount in our

!16 investigation of the economic implications of Bitcoin. Even more paramount is the potential for Bitcoin to change our perception of how a currency “should” or “needs” to operate. In the next section, this paper will attempt to outline the economic implications of Bitcoin, with focus on its implications for GDP, employment, and central banks and their monetary policy. III. Economic Implications of Bitcoin A. GDP and Employment Having established Bitcoin and bitcoins as a quasi currency, it is now time to shift the discussion towards what kind of impacts both Bitcoin and bitcoins can have on economies at both the national and global levels. This analysis will draw from a multitude of different sources including: a recent book published on the subject; commentary from economists, central bankers and their central banks; and articles from academic journals and reputable news outlets. One must keep in mind that entire books have been written on this subject. This paper will focus primarily on the implications of Bitcoin and bitcoins on monetary policy while also observing the potential effects on GDP7 and employment in the United States. The potential implications of Bitcoin and bitcoins are undoubtedly momentous, but the puzzle of if and/or when these immense effects manifest themselves is a subject rampant with controversy and uncertainty. However, the literature agrees that the payment processing potential of the technology behind Bitcoin is much more likely to have a longstanding impact than bitcoins as a currency. Gil Luria, an analyst for Wedbush Securities has done extensive research on the potential impacts of crypto currencies on economies worldwide. He has argued that approximately 21 percent of the American GDP comes from what he dubs as “trust industries”, otherwise known as the financial and banking industries. Bitcoin technology, also known as the blockchain technology that performs the “middlemen” tasks that are currently carried out by the banking sector, will largely digitize and automate these processes (Vigna and Casey 2015, 286). As the Boston Federal Reserve Bank notes “The current system that performs the essential functions of enabling transactions is fragmented, sometimes even within the same bank, and inefficient” (Lo and Wang 2014). Luria’s estimate is based on data from the Bureau of Labor Statistics, encapsulating commercial banks, securities industry firms, funds and trusts, insurance providers, real estate agents, and legal services, a group that employed over 10 million Americans in 2014. While he does not expect that these jobs will simply disappear overnight, he argues that as these industries begin to adopt Bitcoin technology, these jobs will start to disappear gradually (Vigna and Casey 2015, 286-287). 7

Gross Domestic Product

!17 The issue then becomes, how can these technologists and the capitalists, innovating and investing in block-chain technology, produce an argument that can reconcile substantial job losses with increased economic efficiency while minimizing public backlash. On one end, millions of people will be losing their jobs, and society will grieve for their hardships. On the other end, everyone, including those who have lost their jobs, are saving three percent on their transaction costs, which will have an immense economic impact. Small businesses will be able to expand their slim profit margins, and corporate giants will be able to increase investment in research and development, cut prices, and increase profits. From the perspective of an average news cycle however, the public is observing millions of individuals losing while society as a whole is gaining, which is often not received well by the general public. While some believe that these jobs can be regained via these workers receiving new training, it is much more reasonable to assume that the vast majority of these jobs will not be returning and that frictional unemployment will rise as workers struggle to apply their skills in a changed economy (Vigan and Casey 2015, 288). Currently, the industry for payment services generates approximately $500 billion dollars per year in revenue, where the financial services industry charges between a 2.5-3.0 percent fee on all payments for a service, that as venture-capitalist Chris Dixon notes, “mostly involves moving bits around the Internet” (Bort 2013). The current institutional setup for payment services is expensive and inefficient, essentially imposing a three percent tax on all transactions that, with the recent rise in internet payment fraud, is astonishingly prone to failure. Worse still, small business that often have have extremely small profit margins cannot afford to pay the fees for banks to act as middlemen. In an increasingly digital world, small businesses need to be able to accept payment in forms other than cash in order to survive, yet the current institutional setup is rigged against their success (Bort 2013). The Boston Federal Reserve Bank agrees, noting: “It is imperative that new methods be invented to improve efficiency. In some cases, it may be cheaper to replace the existing system wholesale than to try to reconfigure it piecemeal. In principle, any of the functionality or services related to payment and transfer offered in the existing financial system should be, and likely will be, a candidate for reform if such reform can result in greater efficiency by using technology developed in the open-source distributed network framework that is at the foundation of Bitcoin.” (Lo and Wang 2014) Hence, the current financial system is extremely inefficient. While that inefficiency provides over 10 million Americans with incomes, as the financial industry moves towards implementing block-chain technology into their payment processing systems those incomes will gradually shrink and disappear as costs are cut. These cuts however, have the potential

!18 to save both merchants and consumers exorbitant sums of money and to increase economic efficiency by a whopping three percent. B. Central Banks and Monetary Policy As previously mentioned, the total amount of bitcoins in circulation is capped at 21 million by 2140, which implies built-in scarcity. This is a major issue however, and there is reason to believe that this is why, while Bitcoin may have potential for future technological innovations in payment processes, bitcoins do not have much potential to survive as a currency. If bitcoins did mature and become a widely used medium of exchange, the inflexibility of its supply could have immense economic consequences. This has already been observed when it went through its first money-supply shock with the failure of the exchange Mt. Gox. People began to lose faith in the bitcoin exchanges, and as a result, many withdrew their coins in a frenzy of panic leading to a large decline the volume of transactions. If this hoarding of bitcoins were to happen in the future, it could greatly threaten bitcoin’s status as a medium of exchange and thus lead to its entire demise as a currency (R.A. 2014). Worse still, as former central banker Mark Williams notes, there is an extreme risk for deflation once the threshold of 21 million coins has been reached. He notes that the supply limit of bitcoins is a “naive approach [that] assumes that a currency supply formula derived today can automatically meet the ebbs and flows of economic cycles over 130 years without monetary interventions or input of human judgement” (Williams 2014). Moreover, Vigna and Casey (2014) note: “For a global economy that runs on credit and is no longer accustomed to the rigor of monetary control, such as system could do great harm...in times of financial panic and economic disruption, people would hoard the limited-supply and highly sought after digital currency. This would restrict the flow of money to everyone else and exacerbate the downturn. Without a central bank acting as a lender of last resort, we would all starve for currency. It would, in effect, be a repeat of the Great Depression.” (294) Hence, the supply of bitcoins as they currently stand is a major issue. The limited and exogenous supply prevents central banks from acting as a lender of last resort in times of crisis, which even a few classical economists argued is a feature of paramount importance for any successful economy. While deflation is certainly a pressing issue, one should not discount Bitcoin due to its potential deflationary issues. Central banks have begun to explore the use of virtual currencies as a replacement for current fiat currencies due to the prospect of increased

!19 efficiency. As the Economist notes central banks are doing “as they should; Bitcoin transfers are cheap, relatively fast and secure.” (R.A. 2014). The Bank of England, in conjunction with computer scientists at both MIT and University College London have created the RSCoin. Essentially, the Bank of England is attempting beat Bitcoin at its own game, by creating a virtual currency, using the same block-chain payment processes yet it is still a tool of state control. It would allow a central bank to still exert influence over the money supply and to respond to crises. Furthermore, it could allow central banks greater control over the money supply by eliminating the fractional reserve system (Evans-Pritchard 2016). One should keep in mind, however, that this is the first study of its kind, and that conclusions drawn from this study will certainly need to be further tested and investigated. Currently, Bitcoin’s ledger is maintained by computers around the world owned by individuals and merchants who participate in the buying and selling of bitcoins. These individuals and merchants are forced to abide by regulations imposed by a central bank with regards to their bitcoin transactions, and thus can be (and often are) looked at with suspicion. RSCoin’s ledger, however, is only in the hands of the Bank of England. As a result, only the Bank of England has the power to change the money supply. Thus, unlike with fiat currencies, the money supply of the RSCoin is truly exogenous. This has greatly peaked the interest of central banks around the world, as its control over the money supply of these “inhouse made” virtual currencies would be much more precise than the control they have at present over the supply of fiat currencies. In an interview, when asked if the Federal Reserve’s control over the money supply was akin to using a joystick, Senior Fellow at the Cato Institute Gerald O’Driscoll replied: “I winced a little when you said that because the joystick assumes a very precise control which is exactly what they [the Federal Reserve] don’t have” (O’Driscoll 2011). This control would allow them to make much more exact calculations when initiating programs such as quantitative easing during times of financial crisis (Simonite 2016). While the supply of money is currently not an issue, Paul Krugman argues that it certainly could have been. Krugman (2015) wrote this article before the Federal Reserve moved to increase the Federal Funds Rate, and he argued that the American economy was in what Keynes dubbed a liquidity trap: “Actually, under current conditions - in a liquidity trap - it’s [the money supply] not even under the indirect control of the Fed...the Fed can stuff the banks full of reserves, but at zero rates those reserves have no incentive to go anywhere, and even if they do they can sit in safes and mattresses” (Krugman 2015).8 Had the downturn 8

In this article Krugman also argues that monetary policy as a whole is impotent, and while I disagree with him on that point, it is beyond the scope of this paper to investigate that issue. I believe his logic used in the passage above, however, is sound.

!20 worsened for one reason or another, due the interest rates being at the zero lower bound, the usage of monetary policy by the Federal Reserve would have been largely handicapped. Moreover, central banks having more control over the money supply would certainly help to improve the effectiveness of monetary policy, especially during economic crises. Overall, having the supply of a currency be truly exogenous is something that would be extremely useful to central banks around the world. Furthermore, one of bitcoin’s fundamental issues is that of trust, and this is where the RSCoin excels. It would be much more likely to gain mass acceptance since the ledger would remain solely in the hands of the Bank of England, thus having a state authority backing the currency. What the Bank of England found was that its RSCoin was much safer, less volatile, and that the supply could increase indefinitely. The RSCoin still achieves the goal of eliminating commercial banks as the middlemen, and thus reducing costs, but it also ensures that there is central oversight and regulation (Evans-Pritchard 2016). As one can see, virtual currencies have the potential to be an extremely useful tool for central banks, and they are just beginning to explore the potential applications of virtual currencies for use in future monetary policy.

IV. Conclusion - Come What May At present, the future of both Bitcoin and bitcoins are unfolding in front of our very eyes. The future of bitcoins as a widely used currency in place of fiat currencies is one that I believe to be unlikely, but the future is uncertain. As Tillier (2014) notes “No matter what the European Court says, bitcoin’s status as a legitimate, widely accepted currency is not about court rulings. It is about the number of people that use it for transactions”. The amount of people that use bitcoins for transactions greatly depends on the number of retailers that will accept bitcoin as a form of payment. That number depends on society’s confidence and trust in bitcoins as a viable and stable currency. There is no precise nor viable way to predict whether or not societies around the world will accept bitcoins as a currency like they do their respective fiat currencies. Bitcoins do not fully embody any of the three “standards” of a socially accepted currency and the value of bitcoins are extremely volatile. Hence, I believe that it will be extremely grueling for virtual currencies to replace contemporary fiat currencies and be adopted and accepted as a currency on a large scale.9


Bitcoin’s value volatility has been consistently low in recent months however, and if value volatility remains low, it could greatly change Bitcoin’s future as a currency. Further elaboration on this subject and its implications, while interesting and paramount, are beyond the scope of this paper.

!21 I firmly believe that, instead of currency usage, the large scale impact of Bitcoin will come from the new and innovative technology that forms the backbone of Bitcoin’s system. As Casey (2014) notes: “Bitcoin’s fast, low-cost system for authenticating information not only makes it possible to make payments without fees going to credit card companies, banks, payment processors or exchange houses, but also to decentralize many other economic functions. Since any information can be embedded into the blockchain ledger and because the core software is an open platform, startups are building myriad “Bitcoin 2.0” applications based on the same principle: blockchain-based ride-sharing services, personal ID systems, database management and asset registries, even the wild idea of companies run not by human managers but by software programs.” The applications for the block-chain technology that was created along with bitcoins are just beginning to be explored and are seemingly infinite in number. The largest impact I believe this technology can have on society stems from its efficiency potential. Eliminating the three percent fee on transaction costs will give an immense efficiency boost to economies all over the world, but these efficiency gains come at a great employment cost.10 Regardless, financial institutions around the world have begun to test and implement Bitcoin’s blockchain technology as a method to cut costs, and this can have an immense impact on the global economy at large. As one can see, the future of Bitcoin and bitcoins are extremely uncertain. Worldrenowned economist John Maynard Keynes summarizes the situation well: “By "uncertain" knowledge … I do not mean merely to distinguish what is known for certain from what is only probable. The game of roulette is not subject, in this sense, to uncertainty … The sense in which I am using the term is that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention … About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know!” (Keynes 1936, 113-114) It is impossible to predict what exact implications Bitcoin and other virtual currencies will have on society and the global economy. This paper has shed some light on the potential magnitude and scope of the impacts that virtual currencies will have on the world in the future, but there is still much work to be done and even more questions that need to be uncovered and answered. The single truly certain prediction that one can make on the subject is that the future is uncertain. Only time will unveil how future economies and societies wil 10

What effect increasing unemployment rates on such a large scale could have on societies across the world is an interesting question that is unfortunately also beyond the scope of this paper.

!22 be impacted and changed as a result of the innovations that virtual currencies have brought and will continue to bring.

!23 References A., R. 2014. “New Money.” The Economist. The Economist Newspaper. March 17. http:// www.economist.com/blogs/freeexchange/2014/03/bitcoin. Aratari, Dominic, Tal Yellin, and Jose Pagliery. 2015. “What Is Bitcoin?” CNNMoney. Cable News Network. http://money.cnn.com/infographic/technology/what-is-bitcoin/. Böhme, Rainer. 2015. “Bitcoin: Economics, Technology, And Governance.” The Journal Of Economic Perspectives 29 (2): 213–238. http://www.jstor.org/stable/10.2307/24292130? ref=search-gateway:720228d01940e9a8674af850daa9fa4a. Blumberg, Alex, Dave Kestenbaum, and Gerald O'Driscoll. 2011. “The Invention Of Money.” Other. This American Life. http://www.thisamericanlife.org/radio-archives/episode/423/ the-invention-of-money?act=2#play. Bort, Julie. 2013. “Andreessen Horowitz VC Chris Dixon Defends Bitcoin.” Business Insider. Business Insider, Inc. December 31. http://www.businessinsider.com/chris-dixon-defendsbitcoin-2013-12. Casey, Michael J. 2014. “Why Bitcoin's Volatile Price Doesn't Matter.” WSJ. Wall Street Journal. December 21. http://www.wsj.com/articles/why-bitcoins-volatile-price-doesntmatter-1419211994. Evans-Pritchard, Ambrose. 2016. “Central Banks Beat Bitcoin at Own Game with Rival Supercurrency.” The Telegraph. Telegraph Media Group. March 13. http:// www.telegraph.co.uk/business/2016/03/13/central-banks-beat-bitcoin-at-own-game-withrival-supercurrency/. Gibbs, Samuel. 2015. “Man Buys $27 of Bitcoin, Forgets about Them, Finds They'Re Now Worth $886k.” The Guardian. Guardian News and Media. December 8. https:// www.theguardian.com/technology/2015/dec/09/bitcoin-forgotten-currency-norway-oslohome. Goodwin, Neva R., Jonathan Harris, Julie A. Nelson, Brian Roach, and Mariano Torras. 2014. Principles Of Economics in Context. New York, NY: M.E. Sharpe.

23 Kelly, Brian. 2015. The Bitcoin Big Bang: How Alternative Currencies Are about to Change the World. Hoboken, NJ: John Wiley & Sons. Keynes, John Maynard. 1997. The General Theory of Employment, Interest, and Money. Amherst, NY: Prometheus Books. Krawisz, Daniel. 2015. “Bitcoin As a Store of Value, Unit of Account, and Medium of Exchange Daniel Krawisz.” Nakimoto Institute. Nakimoto Institute . January 12. http:// nakamotoinstitute.org/mempool/bitcoin-as-a-store-of-value-unit-of-account-and-mediumof-exchange/. Krugman, Paul. 2015. “The Fed Does Not Control The Money Supply.” The New York Times. The New York Times. May 6. http://krugman.blogs.nytimes.com/2015/05/06/the-fed-doesnot-control-the-money-supply/?_r=0. Leger, Donna. 2014. “IRS: Bitcoin Is Not Currency.” USAToday.Com. USAToday. March 25. http://www.usatoday.com/story/money/business/2014/03/25/irs-says-bitcoin-isproperty/6873569/. Lo, Stephanie, and J. Christina Wang. 2014. “Bitcoin As Money?” Current Policy Perspectives 14 (4): 1–28. https://www.bostonfed.org/economic/current-policy-perspectives/2014/ cpp1404.pdf. Simonite, Tom. 2011. “What Bitcoin Is, And Why It Matters.” MIT Technology Review. Massachusetts Institute of Technology. May 25. https://www.technologyreview.com/s/ 424091/what-bitcoin-is-and-why-it-matters/. Tillier, Martin. 2015. “Bitcoin's Price Doesn't Matter, But the Volatility Does.” NASDAQ.Com. NASDAQ. November 12. http://www.nasdaq.com/article/bitcoins-price-doesnt-matter-butthe-volatility-does-cm542294. Vigna, Paul, and Michael Casey. 2015. The Age of Cryptocurrency: How Bitcoin and Digital Money Are Challenging the Global Economic Order. New York: St. Martin's Press. “What Can You Buy with Bitcoins?” 2015. CoinDesk RSS. CoinDesk. October 19. http:// www.coindesk.com/information/what-can-you-buy-with-bitcoins/.

!25 Williams, Mark T. 2014. “World Bank Conference.” In . Boston University. http:// www.bu.edu/questrom/files/2014/10/Wlliams-World-Bank-10-21-2014.pdf.

!26 Talking Investment with First Reserve’s John Hill Caroline Belina, Class of 2019 When John Hill and William Macaulay started First Reserve about 32 years ago, they took over a private equity fund that had been raised to invest in natural gas. It was 1981, he recalls, and the fund was in trouble. It was also the first energy fund raised for the two investors. “It got into trouble early and lost about two-thirds of its value in the first year or two,” John Hill stated over the phone. Hill and his partners fired the general partner of that partnership. He and Macaulay took it over in ’83 when it was worth 30 cents on the dollar in an attempt to retrieve their bill of returns. Over the next decade, they built it back and got all the money back. During this time, investors liked what Hill and Macaulay were doing with the troubled fund. Hill and Macaulay raised their first fund in 1985 and have raised thirteen private equity funds and two infrastructure funds since then. The first fund they raised was around 16 million dollars. The next one was 65 million and one after that was 250 million. These funds kept growing and their last one was roughly 4 billion. Hill stated that he enjoys getting to work early, before the phones start ringing. He added that he reads The Wall Street Journal, The Financial Times, and the business section of The New York Times to see if anything happened overnight that could affect his investments. Hill then discussed his typical work day. During his Monday staff meetings, he connected with his offices in London, New York, Houston, Greenwich and Hong Kong by video conferencing to go over their portfolios. The rest of his day, he stated, is spent looking at new investment ideas or talking to investors and answering their questions. When this interview was conducted, in February of 2017, he was busy talking to his investors about his infrastructure funds as global investment management corporation Black Rock had recently offered to buy their infrastructure business from them. After deliberation, First Reserve decided to sell it to them. Hill made it clear that he is much more than just a business man. He mentioned that when he is not at work, he enjoys sport fishing. He has a fishing boat and fishes for big marlin. He also touched on his involvement in the conservation of fish and is trying to get laws enacted to reduce the killing of these fish. It doesn’t stop there, though. Hill works on a foundation board where he supports research to help develop better rules and regulations that will keep these fish from becoming extinct. He is also involved with an aquarium in South Carolina that has the world’s largest turtle hospital. Some of these turtles are at the

hospital anywhere from six weeks to a couple of years. When they are ready to be released back into !27 the ocean, they have to be released into warm water. Hill supports the hospital by providing his boat to deliver the turtles to the gulf stream, roughly sixty miles out during the winter season. Despite his success, every investment in his business has not always worked. Hill emphasized that he learns more from his investments that don’t work than the ones that do. He doesn’t take his intelligence for granted, either. Hill touched upon the notion that there’s a tendency when you have a successful investment to think that you are smart and to forget to examine it or spend time focusing on why it was so successful. Yet when an investment fails, one will spend time asking what he did wrong. About an eighth of Hill’s investments don’t work out. What makes Hill such a good dealmaker, though, is that he’s a risk taker and that he’s able to negotiate terms. As he mentioned, this sometimes means having the willingness to walk away if he decides he won’t get a deal. “I think one thing that distinguishes First Reserve is our diversity across the whole energy industry. Most of our competitors just invest in oil and gas—the upstream part. The other thing that distinguishes us is that we’re global,” he added. Most of his competitors are focused on the domestic market. “Some of them do a little bit of Europe and others do a little bit of Latin America,” Hill stated, “but I think we’re the only global investment manager. This gives our investor a much better opportunity to earn superior returns.” Hill is actively drilling in places such as Brazil, Angola, Vietnam and Cambodia. It should be noted that his firm does a lot of foreign travel and spends a lot of time on airplanes. Because every investment has to stand on its own, Hill made clear that he doesn’t care if it is onshore or offshore. It’s based on what kind of rate of return he thinks he can earn. He mentioned that currently, most of the options he looks at that meet First Reserve’s rates of return are onshore. He added that he sees opportunities in the Gulf of Mexico right now that meet their returns as well, though. The process of acquiring an oilfield depends on where he is. “In west Texas, the land there is owned by ranchers and landowners, so you acquire the right to drill from them” he stated. “The landowner doesn’t put up any money, but they get between five and twenty percent of the profits. That’s the process where you’re dealing with private landowners. In a good part of the United States, particularly in the west — Wyoming, Colorado, North Dakota and Utah — a lot of the land is owned by the federal government and you buy leases from the government. This is the same for offshore. The US government owns the offshore oil and gas in this country so they put lease blocks up for bid and the

!28 highest bidder wins the right to drill on that oil block. The government brings in hundreds of millions of dollars a year just from the sales of these leaseholds, and, if oil and gas are found, they bring in billions of dollars a year from their share of the profits. This is typically the case in other countries. In Brazil we participated in buying some offshore blocks that the government put up for sale.” Hill made clear that he believes that First Reserve will stay the same size it currently is. They have about 150 employees today and their last fund was about 4 billion dollars. “I think our next fund will be about the same size,” he said. “Unlike some of the other private equity firms like Blackstone who really has become a huge firm, we just want to stick to investing in energy and funds of the 3 and a half to 4 billion dollar size.” Hill started working in this industry when he was in high school. He was a general worker in the oil industry fixing pipeline breaks and working on drilling rigs. He grew up in west Texas and those were the good jobs for summer employment during high school and college. While taking classes in natural resource economics during undergraduate school, he stated “I studied pretty hard”, and added that when he ended up in government as the deputy of the Federal Energy Administration “energy became my total life.” What is perhaps most surprising is the risk that he took with First Reserve’s chairman, William Macaulay. Macaulay worked at a firm called Oppenheimer while Hill was at one titled Eberstadt Asset Management. Both of their firms invested their own capital in private equity deals. Hill mentioned that he had a deal he was working on and was trying to buy some additional drilling rig out of bankruptcy in Norway. His firm only wanted to buy part of it. Macaulay’s firm ended up investing in the deal, which turned out to be quite successful. “Both of our firms were bought out at about the same time and we decided over time to start our own firm so we could control our own destiny. We started the firm in ’81 but didn’t take over that troubled fund until ’83 and raised our first fund in ’85,” he says. After all, as we learn from John Hill’s story, a successful man does need to be a risk taker.


Centrally Banked Digital Currency: A Study of Key Innovations and Possible Economic Effects of Issuance of Digital Currency by a Central Bank Alexander Jermann, Class of 2020 Introduction When the first banknote was introduced it was based on a new technology, namely the printing press. It had become widespread enough that it was feasible to issue uniform and standardized banknotes of sufficiently good quality on a large scale. Several centuries later, we can say the same thing about modern communication technology. Access to the internet is widespread and computers and smartphones have become household items in several countries. Several central banks, namely the Bank of England, Bank of Canada, Bank of Japan, Sveriges Riksbank (Swedish central bank) and more, have showed active interest and have started research into the area of so-called ‘digital currency’ – including into the possibility of a central bank variety. After all, it is the role of the central banks to stabilize the financial system through monetary policy and operations, where innovation can either pose a threat or opportunity for financial stability. Rather than outlining a full implementation of a central bank digital currency, this paper aims to touch on conceptual points by posing following questions. What is the key innovation in private-sector digital currencies such as Bitcoin? What would the economic implications of introducing a digital currency be? What would a monetary framework with central bank digital currency look like? In section I, I will define the terms ‘digital currency’ and ‘electronic money’ and highlight the difference between them. I will then highlight todays legal underpinnings of privately issued digital currency in the United States. In section II, I will lay out the motivation for a possible implementation of a central bank issued digital currency and explore possible economic implementations and consequences of such, by drawing on early research papers and speeches by the Bank of England, Bank of Canada, Sveriges Riksbank and others. Section III will conclude this paper and outline my final thoughts. Section I Definition of Digital Currency The term ‘Digital Currency’ can lead to different understandings and has not been given a uniform definition yet (Barrdear & Kumhof, 2016, p. 4). The Bank for International Settlement11 for example identifies three main aspects that are traditionally associated with 11

More specifically subgroup within the Committee on Payments and Market Infrastructure (“CPMI”) called Working Group on Retail Payments.

!30 digital currencies12 to form a definition. First, digital currencies have some monetary characteristics. Digital currencies are used as means of payment, but are not only not issued in, or connected to, a sovereign currency, but are also not a liability to any entity (CPMI, 2015, p. 1), meaning that they are in traditionally characterized as being a purely ‘private’ form of payment (Id.). Digital Currencies are fully self-contained and derive their value only from the belief that they can be exchanged for other goods and services of value (Id.) Second, digital currencies have a unique transfer mechanism, which is implemented through distributed ledgers (Id.).13 They are what render digital currencies their innovative character. Third and last, there are a variety of non-bank institutions developing and operating digital currency and distributing ledger mechanisms. Definition of Electronic Money In 2000, the EU issued an Electronic Money Directive (“EMD”) which defines ‘Electronic Money’ as monetary value as represented by a claim on the issuer which is: (1) stored on an electronic device; (2) issued on receipt of funds of an amount not less in value than the monetary value issued; (3) accepted as means of payment by undertakings other than the issuer (European Parliament, 2000, p. 249). This definition essentially means that electronic money is usually denominated in the same currency as the central bank or commercial bank money and can be easily exchanged at the same value and redeemed in cash (CPMI, 2015, p. 4). The definition of Electronic Money has shifted since the EMD was released, possibly to include new innovations like digital currencies. While the new and broader definition of electronic money now includes digital currencies, legal underpinnings of several jurisdictions are based on the definition of electronic money as proposed by the EMD and thus does not apply to digital currencies. For example, in the EMD electronic money is considered to be a claim to an issuer (European Parliament, 2000, p. 249), a fact which does not apply to digital currencies since there are no central institutions that redeem digital currency against something. It is rather denominated in its own unit of value (CPMI, 2015, p. 4). This motivates the next section, answering the question of how electronic money and digital currency are different from each other.


Note on terminology: While I recognize that the term ‘digital currency’ is not adequate in this context, it is used in this paper because it is a widely-used term for the described aspects. An alternative term would be ‘virtual currency’, because it reflects its purely virtual and non-physical form. Other common terms are ‘Cryptocurrency’ reflecting cryptographic principles used in its issuance and security. 13

Distributed ledgers, or also commonly referred to as ‘blockchain’ (see infra note 8.) are regarded as ‘revolutionary’ in the academic world for its breakthrough on a problem referred to as ‘Byzantine General Problem’ in computer science (see Lamport, 1982 & Miller, 2014).

!31 Difference between Electronic Money and Digital Currency The first and most important distinction between electronic money and digital currencies is that digital currencies, like Bitcoin, are considered to be assets under existing legal precedent in the United States. The fact that there is a fixed amount of digital currency, make it resemble commodity money14 , but without the actual commodity-backing15 (Id.) In many ways, digital currency share a lot of attributes with physical cash. In digital currency, value is immediately16 transferred from payer to payee in the absence of trusted intermediaries. Usually electronic records of money are transferred in centralized infrastructures, where a trusted entity clears and settles transactions. But in digital currency schemes, a distributed ledger allows for remote peer-to-peer exchanges of electronic value in the absence of trust between the parties (Ibid., p. 5). This means that when person A makes a transaction to person B, it does not go through any bank, financial institution or any other centralized institution like it traditionally does. Like in paper money, value is transferred immediately. It also has important implications for the faster speed and lower cost of transactions. Every person participating in a transaction holds a digital wallet containing a set of cryptographic keys17 (public and private key) that gives them access to the value stored as bookkeeping entries in the distributed ledger (Id.). The payer uses these keys to initiate a transaction of a specific amount to the payee. The transaction then goes through a confirmation process that validates the transaction and adds it to the unified ledger, and if confirmed distributes copies in the peer-to-peer network. In other words, a transaction is confirmed when the ledger that is distributed in the network gets updated (CPMI, 2015, p. 5). The distributed ledger is often referred to as the blockchain18 or a “Triple-Entry Accounting”19 system on a public ledger.


It is important to note that these are not defining properties of digital currency, since they can be altered and are vary in different jurisdictions. 15

Wordplay to illustrate that digital currencies carry no ‘intrinsic’ value like for example gold.


Value is transferred almost immediately, although the record of the transaction only gets added in ‘blocks’ to the distributed ledger which are designed to be added every ten minutes on average. Once on the ledger, the transactions are virtually unchangeable (Nakamoto, 2008). 17

To read more about the technical aspect see (Nakamoto, 2008)


The name blockchain originates from the distributed ledger technology. Instead of having a continuous ledger, in order to add transactions to a distributed ledger, the ledger gets split into ‘blocks’ which are cryptographically linked to each other, to ensure that the order or content of transactions does not get altered after. Those blocks get added to the distributed ledger in time intervals that average ten minutes (see also Nakamoto, 2008). 19

See chapter Digital Currency Systems and Distributed Ledgers for description of term.

!32 Another difference between digital currency and electronic money alternatives are their institutional arrangements. Traditional e-money schemes underlie several different institutions for the issuance of e-money, for operation of the network, for acquiring e-money and to clear of e-money transactions. In contrast, digital currencies are not operated by any specific individual or institution, which is an important distinction for lawmakers. Digital currencies do however have intermediaries that provide services such as, ‘wallet’ services to facilitate transactions of value and/or exchange services to exchange between digital currencies and legal tender national currencies. The main innovation of digital currencies is not the ‘asset aspect’ of the currency, but rather to the ‘payment aspect’ meaning the peer-to-peer network built upon a distributed ledger that introduces a way to reach consensus across a large network of untrusting agents. Distributed ledgers do in no way constrain digital currencies to a monetary framework similar to Bitcoin. Quite on contrary, distributed ledgers allow for almost unlimited monetary design implementations. Bitcoin first offered the distributed ledger technology in an open source format. But the source code and structure can be copied or modified to fit any parameter. While Bitcoin does not require any identifying information to participate in an exchange, a digital currency design can require as much or as little information as needed. Legal Analysis of Digital Currency The emergence of digital currency pose several challenges for federal agencies responsible for financial regulation, law enforcement, and consumer and investor protection agencies. These challenges emerge from the design infrastructure of digital currency, such as the possible high degree of anonymity, and ease of transacting across borders. These factors have made privately issued digital currencies like Bitcoin very attractive for criminal activity, such as to launder money, for tax evasion, or to make payments in online ‘black markets’ like for example one called ‘Silk Road’ (Kien & Meng, 2014, p. 595). In 2013 for example, the Securities and Exchange Commission (“SEC”) charged Trendon T. Shavers with defrauding investors in a Ponzi scheme20 . In his defense, Shavers argued that Bitcoin investments were not securities because Bitcoin is not money and is not regulated by the SEC.21 Thus, implying that he did not violate any US securities laws. This court case shows how the regulatory environment has not been fully defined yet for digital currencies.


SEC Charges Texas Man with Running Bitcoin-Denominated Ponzi Scheme, U.S. SEC. Exchange (July 23, 2013), http://www.sec.gov/News/PressRelease/Detail/PressRelease/ 1370539730583#.UoVzwfmsh8E. 21

Kirsten Salyer, Ponzi-Scheme Charge Is Good News for Bitcoin, BLOOMBERG (Aug.7, 2013), http:// www.bloomberg.com/news/2013-08-07/ponzi-scheme-charge-is-good- news-for-bitcoin.html.

!33 Regulations on digital currencies like Bitcoin vary greatly from jurisdiction to jurisdiction. If we analyze the regulatory landscape in the United States that covers digital currencies, we see that there are different ways that Bitcoin could be regulated. One being under the Banking Secrecy Act (“BSA”) or more commonly referred to as the “Anti-money laundering” law.22 Rather than regulating individuals transacting in Bitcoin it could govern Bitcoin exchanges and/or other related businesses which function as the gateway to Bitcoin, and thus indirectly regulates Bitcoin by requiring companies to collect more information of its account holders. It could not be regulated under the Securities and Exchange Act of 1934 (15 U.S.C. § 78), because Bitcoin does not have a note-like character, since it is not an instrument for which the maker promises to pay a sum of money to another party (Ibid., p. 598).23 Even the Electronic Fund Transfer Act of 1978 (“EFTA”) which at first glance seems to apply to Bitcoin, does not because it is designed to apply to financial institutions engaging in or facilitating electronic fund transfer (Kaplanov, 2012, p. 111, 137-38). The Financial Crimes Enforcement Network (“FinCEN”) issued an interpretive guidance titled “Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies.” and was meant to clarify the applicability of the law to virtual currencies.24 It has two major implications for Bitcoin. First, purchasing goods and services with Bitcoin is not a money services business, however selling Bitcoin, whether as an individual or business makes the actor a money transmitter and thus subject to FinCEN’s regulations for money service businesses (“MSBs”) (Kien & Meng, 2014, p. 602). Second, any company that exchanges Bitcoin and USD is subject to FinCEN regulations for MSB, essentially meaning that they have to meet registration, reporting and record keeping requirements demanded of the BSA and thus eliminate any of Bitcoin’s anonymity benefits (Id.). Digital Currency Systems and Distributed Ledgers A. The Blockchain: “Triple-Entry Accounting” on a Transparent Public Ledger In the ‘physical’ world things are secured with locks, vaults and signatures. In the ‘digital’ world things are secured with cryptography. Electronic transfers of money have traditionally required a financial intermediary – for example commercial banks, brokerages, 22

See FinCEN’s Mandate from Congress, Dep’t of the Treasury Fin. Crimes Enforcement Network, http:// www.fincen.gov/statutes_regs/bsa., p. 71 23

See Derek Dion, Note, I’ll Gladly Trade You Two Bits on Tuesday for a Byte Today: Bitcoin, Regulating Fraud in the E-Conomy of Hacker-Cash, 2013 U. ILL. J.L. TECH. & POL’Y 165, 176–77 (2013). 24

Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies, DEP’T OF THE TREASURY FIN. CRIMES ENFORCEMENT NETWORK 1 (Mar. 18, 2013) (quoting 31 CFR § 1010.100(m)), available at https://www.fincen.gov/sites/default/files/shared/FIN-2013-G001.pdf

!34 or companies like PayPal – to establish security and trust in transactions. Financial intermediaries preserve a centralized ledger25 to track account balances and ultimately vouch for a transactions authenticity (Singh, 2012, p. 323). Without intermediaries, digital units of value can be copied and spent twice, or just as any digital document can be replicated ad infinitum (Kiviat, 2015, p. 577). The blockchain is a cryptographic technology and offers a way to make secure payments in the absence of a trusted party. It can be referred to as a triple-entry system – as opposed to modern financial accounting practices of double-entry – because transactions on the blockchain are essentially entries that are cryptographically sealed, preventing tampering and enabling near real-time auditing (Id.). Blockchain enabled payment systems have traditionally had very low transaction costs, because they have an automated system and because the user determines the transaction fee (must be above zero units of value). B. Economic Properties of Blockchain-Based Currency Why should we even consider implementing digital currency or in a more technical term blockchain-based currency? I argue because it offers a more efficient (in regards to speed and cost) medium of exchange. Given the features of digital currency, it is capable of performing essential features of transactions – such as record keeping, auditing, monitoring, enforcement, or asset custody (meaning escrow) in addition to actual transfer of value – automatically. In traditional electronic payment systems, clearing and settling transactions take time and are costly. For example, at the moment, the Automated Clearing House (“ACH”) handles 20% of all electronic payments in the US (Ibid., p. 586) which sums up to $40 trillion USD per year. Nearly all customer transactions, take two to three days in comparison to a few seconds in digital currencies (Ibid., p. 587; supra note 6. & 8.). Not only are digital currency transactions faster but also less expensive, companies like Western union or MoneyGram provide transaction services for an average fee of 6-9% per transaction, while the average transaction cost on Coinbase26 is 2%. Applied to today’s remittance market of $600 billion USD, this translates into potential cost savings of $24 billion USD per year for consumers of the service (Id.). Section II The design of privately-issued digital currencies raises questions about the current institutional design of the monetary framework. The most fundamental question being why 25

This used to be a physical ledger; now it is a centralized server network. See Singh, B., Network Security and Management, 323 (3d ed. 2012) (describing how centralized server networks are utilized for Internet banking). 26

An online digital currency exchange and payment platform that uses Bitcoin and other virtual currencies network to make transactions.

!35 the government needs to involve itself in monetary matters at all? If privately issued digital currencies offer fast, secure and virtually anonymous transactions between two untrusting parties, then why does the government not just fully remove itself? There are several issues that would arise if money was a purely ‘private’ matter. One is a matter of uniformity. If there was no public authority27 enforcing the currency how would consensus be reached about what currency to use in transactions? There would be nothing holding back purely private initiatives from starting totally new currencies (Moudud, 2017, p. 3). For example, what would the guarantee be that a grocery store would accept my newly minted ‘Alex-coins’ if they did not have a guarantee that they could use it to buy their merchandise from their suppliers? There would be no way to accumulate capital because there would be no uniform measure. ‘Alex-coin’ would thus not have as much value because it would not be usable in regular transactions, because it is not legal tender. As soon as it is legal tender, it implies some form of central authority or governing body undergirding the currency with a body of law, which by definition is ‘public’. Much in the conception of Christine Desan’s ‘Constitutional Theory of Money’ a tender has no intrinsic value until it becomes money through the government guaranteeing its value through creating and enforcing contracts and property rights (Desan, 2013, p. 5). The governing body creates a legal obligation for businesses to accept the legal tender in a transaction, and requires businesses to pay its workers in legal tender. If we tie this issue back to digital currencies, there are currently over 600 different privately issued digital currencies being used. While Bitcoin is the most prominent one, it only accounts for an infinitesimal fraction of the world economy. Digital currencies like Bitcoin are also mostly used in transactions and directly converted into sovereign currency. Even the most extreme proponents of “laissez faire” see that a large-scale consensus on a monetary framework cannot just arise spontaneously (Ricks, 2016, p. 9). Milton Friedman, a leading proponent of laissez faire in other areas wrote: “Something like a moderately stable monetary framework seems an essential prerequisite for the effective operation of a private market economy. It is dubious that the market can by itself provide such a frame- work. Hence, the function of providing one is an essential governmental function on a par with the provision of a stable legal framework.”28


Public authority mostly refers to government but can refer to any form of acting authority upon a group of people (tribal head, community with governance structure etc.) 28

Friedman, M. (1961). A Program for Monetary Stability. Review of Economic Studies, p. 43, 307-308. https:// doi.org/10.2307/1927299

!36 Reformed Monetary Framework Suggesting the issuance of digital currency by a central bank or public authority raises questions about the monetary framework in a larger context. If we were to introduce a new legal tender, how would it be introduced? Would it be denominated in the national currency or in its own value? Would it complement existing physical cash or would it eventually replace it? How would it be put into circulation? What would the design of the digital currency be? Would it be held in accounts at the central bank or at deposit banks? In general, if we would design a monetary system from scratch, how would we design it? Morgan Ricks proposes a blueprint for what he calls a reformed monetary system (Ricks, 2016, p. 13), which would be implemented in a series of incremental changes to the existing system of money and banking. The reformed system would be one without physical currency (not a necessary condition) and its medium of exchange would only exist in record form in what he calls “R-Currency” (Id.). Such a proposal is not radical at all, since there is “no magic to bits of paper”.29 Today’s high powered money is already fiat30 in nature and only constitutes a small percentage of the overall money supply. The largest portion of money takes the form of bank deposits. Deposits are already essentially just bookkeeping entries in the banks ledger. In the modern financial system, no deposit bank actually keeps all deposits in physical money. Commercial banks hold a reserve of currency which they use to payout deposits to customers, in the case they want to make a withdrawal from their account. But the reserve never covers all deposits at the bank and only constitutes a certain percentage of all deposits. That is why bank runs or panics are so dangerous to the banking system. Morgan Ricks even goes as far as saying that panics – widespread redemptions of the financial sector’s short-term debt – should be viewed as the main danger for financial stability (Ibid., p. 3). In the reformed system, r-currency would only be issued by member banks31 and would be denominated in standard monetary unit (e.g. dollars in the United States) (Id.). Member banks would continue working like demand deposit instruments and people would


Several Economies are already doing steps in that direction “Sweden Moving towards Cashless Economy,” CBSNews .com, March 18, 2012. See also Kenneth S. Rogoff, “Costs and Benefits to Phasing Out Paper Currency,” NBER Macroeconomics Annual 29, no. 1 (2014). 30

Fiat money refers to financial instruments that carry close to no “intrinsic” value in itself and is given its value through the government declaring it legal tender, which it maintains and enforces through the rule of law. 31

Member banks, in the proposed reformed monetary system, are chartered by the government and owned by private shareholders. They would be subject to strict portfolio constraints but in turn would be given the legal privilege to issue currency. Since their accounts would be legal tender they would be ‘non-defaultable’ and thus panic-proof (see also Ricks, 2016, p. 15-16).

!37 hold their account in r-currency at the bank. Each member bank would thus hold a ledger in r-currency reflecting its customers’ accounts. Payments would be made by simply adding entries to the ledger. If this sounds familiar, it is because the proposed system has an uncanny resemblance to digital currencies or more specifically distributed ledgers. In both systems value is reflected in a digital ledger and funds are transferred by adding entries to the ledger or record. The difference here is of institutional nature only. R-currency (or digital currency if it was to take the form of r-currency) would be ascribed because of the same reason that people ascribe value to physical currency today. The government would declare it legal tender and create an anchoring demand through taxation (Desan, 2013, p. 17, 24-8; Ricks, 2016, p. 14). It would be established through legal institutional framework that would establish its value by undergirding it with law, which is of course how fiat money always works (Ricks, 2016, p. 14). Because r-currency would be fiat money it would not be defaultable, much like today’s dollar bills cannot default, essentially meaning that banks would not be required to hold a “coverage cap” or required reserves, since r-currency, or essentially the records on the ledger, are the legal tender. Instead of honoring these instruments with a fiat base money, the government just declares record money to be fiat money. In the reformed monetary system, there would not be a difference between physical money, or so called “base money”, “high-powered money” and the banks deposits, so called “inside money”. Member banks in the reformed system would be chartered by the government and owned by private shareholders. They would be authorized to issue r-currency in exchange for financial assets. By doing so they would augment the money supply, and are thus closely regulated by the government and have various portfolio constraints (diversified investments in high quality credit assets). R-currency does not represent claims on portfolios of the bank or assets, instead they represent sovereign, uniform, non-interest bearing, fiat money – just like today’s physical currency (Ibid., p. 16). The question arises how a member bank would determine how much nominal “broad” money (r-currency and cash equivalents)32 to issue, if there were no reserves. In the proposed reformed system, each member bank would hold a permit entitling it to issue a given aggregate quantity of monetary instruments. That permit capacity would be tradable among member banks, essentially meaning that banks with more attractive credit investments would be able to acquire more capacity to issue more currency than other banks with less attractive credit (Ibid., p. 21). 32

Cash equivalents is a term that emerged from accounting practices to describe financial instruments (i.e. short-term IOU’s) that are somewhat liquid but still susceptible to default.

38 To Central bank or not to Central bank What would the need for a central bank be if we were to implement digital currencies as legal tender under the reformed monetary framework proposed above? The settlement technology in distributed ledgers allows transfers to be verifiably recorded without the need of a trusted third party, which is exactly what a central bank normally does. It performs that role for a specific type of money, namely central bank money (i.e. reserve deposit held by commercial banks) (Broadbent, 2016, p. 2) Digital currency offers distributed ledgers that fulfill the same function at a possibly much lower cost, because verifying such information on a multilateral institutional basis can be costly (Id.). In fact, Morgan Ricks argues that while his proposal is compatible with a central bank, it could do fine without one, because the monetary authority could implement its policy through administrative apparatus in member banks. Other functions of the central bank, like providing a payment system (clearing and settlement) and acting as lender of last resort would be redundant (Ricks, 2016, p. 22). Former deputy governor of the Bank of Canada, Charles Freedman, counter-argued in 2000 that even if central banks were to be replaced, by what he referred to as network money, an institution would have to act as settlement bank essentially taking the role of a central bank, but still carrying risk inherent to settlement banks (Freedman, 2000, p. 222). What he did not know was the possibility that under Ricks and Tobin’s proposal (see CBDC implementation below) and with the new innovation in payment system, so called bank deposits could by definition be non-defaultable and that the settlement process could be settled on a distributed ledger and would thus not be ‘central’. Economic Effects of CBDC Broadbent argues that the economic effects of CBDC depend largely on the extent that it would compete with commercial bank deposits, the main form of money in the economy, because if CBDC was to substitute or mimic physical cash – meaning it would not bear any interest – people would still hold their money in commercial banks because they render interest (Id.). In Ricks proposal CBDC and bank deposits33 are by definition the same thing, making the debate dismissible. Shifting deposits to the central bank, and away from leveraged commercial banking sector has two important implications (Id.). First, it would make deposits safer because the central bank only holds liquid assets and cannot run out of “cash”, while commercial banks hold illiquid assets that cannot always be sold in the open market. Second, taking away deposits from deposit banks could impair their ability to make loans and could make them more dependent on the wholesale market (Id.). It is thus important to study more in detail what economic implications a CBDC would have on the funding of the bank and on the credit markets. 33

Ricks differs from using the term ‘deposits’ because it connotes a storage place stemming from old banking system.

!39 CBDC Implementation Most of the money is held as bank deposits and only a small amount of it is held as notes and coins, which means that most transactions we make involve claims on bank deposits, which is straightforward task if both parties have an account at the same bank. But most of the time such a transaction will involve different banks. In that case transactions are settled at the central bank using the “reserves”34 of the commercial banks (Broadbent, 2016, p. 6). The function of settling inter-bank transaction lies at the heart of central banks and is probably how they came to be in the first place (Shafik, 2016; Goodhart, 1998). Having a CBDC would involve moving those reserve deposits of banks at the central bank on to a distributed ledger, which would not only make exchanging assets more efficient (in terms of cost, complexity and speed), but it also would make it easier to access those assets. So much easier in fact, that it would be simple to extend the range of participants in the distributed ledger to the general public. In fact, there are already several non-bank institutions accessing the current settlement system of the Bank of England called Real Time Gross Settlement (“RTGS”). Essentially everybody could hold a balance on the distributed ledger of the central ledger as CBDC. If that was the case, accounts would no longer be claims to commercial banks but to the central bank which by definition, like banknotes, is non-defaultable (Broadbent, 2016, p. 7). The question remains if introducing a CBDC would compete with cash or bank deposits. Introducing an instrument that facilitates deposits at the central bank will probably account for a ‘narrower’ commercial bank sector. This idea has been materialized by Morgan Ricks, as well as earlier authors like James Tobin. Tobin argued that in order to avoid relying on deposit insurance to avoid bank runs, the government should create what he called deposited currency accounts (“DCA”) (Tobin, 1987, p. 172-73). He described it as a medium with the “convenience of deposits and the safety of currency on deposit and transferable in any amount by check or other order” (Id.). CBDC and Sweden The usage of banknotes and coins has decreased steadily in Sweden since the 1950’s. In fact, cash only comprises 1.5% of GDP today when it used to be 10% in 1950 (see Chart 2). The nominal demand for cash outside the to be 10% in 1950 (see Chart 2). The nominal demand for cash outside the banking sector (by the companies, households and authorities) has fallen from SEK 97 billion in 2007 to around SEK 61 billion today. The Riksbank believes that issuing digital currency would raise the attractivity of central bank again (Skingsley, 2016, p. 8). The deputy governor, Cecilia Skingsley, of the Swedish central bank stated in a


Reserves are often called the “ultimate settlement asset”.

!40 speech that the Riksbank is in fact considering issuing a digital currency called “Ekrona� (Ibid., p. 9). Skingsley stated in her speech that the central bank is currently researching what design implementations would be best for issuing a CBDC and is only advancing slowly because they are aware of the large-scale economic consequences issuing a new currency can have. She supposes that the best solution would be a combination of partly centralized and partly decentralized network structures.

Section III Conclusion There are several central banks interested and actively researching the possibility of implementing digital currencies, but a recurring and ever emerging problem is that there is no precedent or empirical evidence to support research into the possible economic effects of implementing CBDC into the economy. The effects would also largely depend on the exact design specifications of a CBDC. Who would be privileged to issue it? Would it carry interest or would it resemble todays physical cash? Would accounts of CBDC be held at the central bank or at commercial banks? The economic effect of a CBDC would largely be depended on how those types of questions get answered. Another dimension to be taken into consideration is how the public would actually accept such a type of new payment system. There would need to be a clear incentive implemented into the design such a payment system, for example by eliminating paper currency and thus coercing people to use CBDC or through taxation. All the research done so far in this area is either based on calculated speculation or based on general equilibrium models, which as scholars have pointed should be treated carefully because the model was not able to predict the 2008 financial crisis. I argue that there is still a lot of research that needs to be done in this subject to be able to sketch out a definitive monetary framework that could be implemented. An area that definitely requires more work as well is the legal underpinnings of digital property and contracts that undergirds a somewhat automated governance and consensus structure that is the distributed ledger. I hope that the motivation to do so emerged from the possible advantages of digital currency highlighted in this paper, namely lower transaction costs, faster settlement and clearing process, possible implementation of the reformed monetary system as proposed by Ricks and Tobin, and broader access to central bank money which is panic-proof. I argue that such a proposal is not radical and that there is no rigid correspondence to expand balance sheet of

!41 the central banks beyond commercial banks, and possibly even include other financial instruments beside currency. More than ever it requires interdisciplinary research in the cross sections of law, economics and last but not least computer science.

!42 References Barrdear, J., & Kumhof, M. (2016). The macroeconomics of central bank issued digital currencies (No. 605). London. Retrieved from www.bankofengland.co.uk/research/Pages/ workingpapers/default.aspx Broadbent, B. (2016). Central banks and digital currencies. Bank of England, (March), 1–14. Retrieved from http://www.bankofengland.co.uk/publications/Pages/speeches/ 2016/886.aspx Capie, F., Fischer, S., Goodhart, C., & Schnadt, N. (1994). The Development of Central Banking. The Future of Central Banking: The Tercentenary Symposium of the Bank of England. Retrieved from http://eprints.lse.ac.uk/39606/ Committee on Payments and Market Infrastructures (“CPMI”). (2015). Digital Currencies. Basel. Retrieved from http://www.bis.org/cpmi/publ/d137.htm Desan, C. (2013). Money as a legal institution. Harvard Public Law Working Paper, (No. 13-34), 1–32. https://doi.org/10.1093/acprof Desan, C. (2014). Making Money: Coin, Currency, and the Coming of Capitalism. https:// doi.org/10.1093/acprof:oso/9780198709572.001.0001 Dion, D. A. (2014). I’Ll Gladly Trade You Two Bits on Tuesday for a Byte Today: Bitcoin, Regulating Fraud in the E-Conomy of Hacker-Cash. U. Ill. J.L. Tech. & Pol’y, 1, 165. EU. (2000). Directive 2000/46/EC of the European Parliament and of the Council of 18 September 2000 on the taking up, pursuit of and prudential supervision of the business of electronic money institutions. Official Journal of the European Union, L(275), 0039–0043. Retrieved from http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=OJ:L:2009:267:TOC European Parliament & Council of the European Union. (2000). Electronic Money Directive 2000/46/EC. Official Journal of the European Union, 249–252. Retrieved from http:// www.columbia.edu/~mr2651/ecommerce3/2nd/statutes/ElectronicMoneyDirective.pdf FinCEN. (2013). Application of FinCEN’s Regulations to Persons Administering, Exchanging, or Using Virtual Currencies. Reports, 100(mm), 1–6. https://doi.org/March 18 2013 Freedman, C. (2000). Monetary policy implementation: Past, present and future - Will electronic money lead to the eventual demise of central banking? International Finance, 3(2), 211–227. https://doi.org/10.1111/1468-2362.00049 Friedman, M. (1961). A Program for Monetary Stability. Review of Economic Studies, 43, 307– 308. https://doi.org/10.2307/1927299 Fung, B., & Halaburda, H. (2016). Central bank issued digital currencies: A framework for assessing why and how. Retrieved from http://www.bankofcanada.ca/2016/11/staffdiscussion-paper-2016-22/ Hopf, S., & Picot, A. (2016). Crypto-Property and Trustless Peer-to-Peer Transactions : Blockchain as Disruption of Property Rights and Transaction Cost Regimes?, 159–172.

!43 Kaplanov, N. (2012). Nerdy money: Bitcoin, the private digital currency, and the case against its regulation. Temple University Legal Studies Research Paper, 11, 46. https://doi.org/ 10.2139/ssrn.2115203 Kien, M., & Meng, L. (2014). Coining Bitcoin’s “Legal-Bits”: Examining The Regulatory Framework For Bitcoin And Virtual Currencies. Harvard Journal of Law & Technology, 27(2), 587–608. https://doi.org/10.1525/sp.2007.54.1.23. Kiviat, T. I. (2015). Beyond Bitcoin: Issues in Regulating Blockchain Transactions. Duke Law Journal, 65(3), 569–608. https://doi.org/10.1525/sp.2007.54.1.23. Lamport, L., Shostak, R., & Pease, M. (1982). The Byzantine Generals Problem. ACM Transactions on Programming Languages and Systems, 4(3), 382–401. https://doi.org/ 10.1145/357172.357176 Miller, A., & Jr, J. L. (2014). Anonymous Byzantine Consensus from Moderately-Hard Puzzles: A Model for Bitcoin. Retrieved from https://socrates1024.s3.amazonaws.com/consensus.pdf Moudud, J. K. (2017). The Constitutional Approach to Money: A Review of Making Money: Coin, Currency, and the Coming of Capitalism. Nakamoto, S. (2008). Bitcoin: A Peer-to-Peer Electronic Cash System. www.Bitcoin.Org, 9. https://doi.org/10.1007/s10838-008-9062-0 Ricks, M. (2016). The Money Problem: Rethinking Financial Regulation. https://doi.org/ 10.7208/chicago/9780226330464.001.0001 Rogers, J. S. (2005). New Old Law of Electronic Money, The. SMU Law Review, 58(4), 1253– 1312. https://doi.org/10.2139/ssrn.680803 Shafik, M. (2016). A New Heart for a Changing Payments System. Retrieved from http:// www.bankofengland.co.uk/publications/Pages/speeches/2016/878.aspx Singh, B. (2012). Network Security and Management (Third). PHI Learning. Retrieved from https://books.google.co.uk/books?id=lSSCZCk9_nEC Skingsley, C. (2016). Should the Riksbank issue e-krona? Stockholm. Tobin, J. (1987). The Case for Preserving Regulatory Distinctions. Economic Policy Symposium Proceedings, 167–205. U.S. SEC. EXCH. COMM’N. (2013). SEC Charges Texas Man with Running BitcoinDenominated Ponzi Scheme. Retrieved from http://www.sec.gov/News/PressRelease/ Detail/PressRelease/1370539730583#.UoVzwfmsh8E.

!44 Marx on the Division Labor: The shift in Soviet Industrial Ideology During the New Economic Policy Nebila Oguz, Class of 2018 The former Soviet Union, throughout its standing as a republic, used a strongly Marxist rhetoric in order to justify its fascist policies. Its eventual fall in 1991 was recognized by the general public as the failure of Marxist economic policies and therefore the end of the validity of the Marxist theory of value. The Soviet Union aimed to be a proletarian dictatorship, one where the alienation involved with the complex division of labor of capitalist industry was done away with, but when looked at through an Orthodox Marxist lense, it is obvious that this was not accomplished. The goal of this paper is to follow the ideological changes during and before Stalin’s First First Year Plan by looking at the changes made in the structure of Soviet Industry, and going over how Stalin and the Bolshevik government made a conscious decision to choose increased capital over the possibility of a more egalitarian and therefore less alienating method of dividing labor (63). The alienation involved with the division of labor in capitalist production stems from the workers inability to own the products of their labor, or develop their personality during its production. Marx put great emphasis on the division of labor in capitalist industry as it leads to the worker not owning anything except for their labor. The unskilled labor required in the factory is not connected to what is the most efficient but instead relies on what brings the capitalist the most capital, in this case a working class that cannot maintain its existence without the capitalist to provide them with work (Marglin, What do Bosses Do? 1974 p. 63) . In a society like this the value of a product is not measured by what type of skilled labor is put into its production; instead it is based on the amount of unskilled labor that is put into it. The worker is not only alienated physically by not being able to afford the product he creates or put any meaningful labor into its creation, but he is also alienated from the society around him as value is then defined by the amount of abstract labor present, and not how useful the product in question is. THE HISTORY OF THE DIVISION OF LABOR In Part I of the ‘German Ideology’ Marx outlined how changes in the means of production throughout history have affected the development of the division of labor in industry. Marx believed that the means of production in a society form the basis of all ideological and economic developments that happen during that period. The economic superstructure, made up of the relations of production and social structure, is built upon

!45 the means of existence of that society and not the direct choice of its members (Marx A Contribution to the Critique of Political Economy 1859, p. 11). It is important to note this fundamental ideological difference between Marxian and Capitalist Neo Classical thought, for neoclassical thinkers, form their arguments on economic development on the opposite assumption that it is man who makes decisions for himself, and not his environment. As Marx would phrase it, the neoclassical ideology assumes that, “it is [...] the consciousness of men that determines their existence (11)”, Marxists believe, “it is their social existence that determines their consciousness (4)”. Developing on Hegelian dialectic, Marx created the materialist interpretation of history (Marx and Engels, German Ideology, Part 1, p. 3) which instead of being based on man's perception on his place in history, is based on man’s material place in history; how he maintains his existence in the world (6). Man is able to separate himself from other species because he can produce for himself, he is not completely dependent on what is readily available, and therefore the action of production is not just a simple activity, but it is a means of survival and method of existence. How humans live, their environment, is defined by the means of production that they have at hand and create, and because of this Marx concludes that this production also makes the basis for all social and intellectual dynamics that are present in a society at any given time. The social hierarchy, the system of economy and politics are all dependent on production for survival, as they are made up of individual men who produce in order to stay alive, and are therefore limited in their development by the material world that surrounds them.The technology, the method of production, automatically puts man in a certain social structure for he cooperates with others to produce his own subsistence; in this way all structures of society are based on the forces of production and the social relations that are born out of this (5). The division of labor is a very important part of Marx’s dialectic materialism as it defines its social aspect; it is the social structure that comes out of man's co-operation during production. The division of labor plays a role in a nation's history as well; it is what separates town and country through separating industrial and commercial labor from the agricultural. The form of division of labor that is in place in a society reflects the dominant form of ownership that is prevalent; therefore through tracking the changes in the conception of private property, one can also follow developments in the division of labor (11). The first type of property relation and form of division of labor is that of tribal ownership. In this stage people still live through hunting and fishing and have not yet

!46 developed any real type of production. The most advanced type of production that is present in this stage is agriculture, and even that is not at all extensive; there are still very large plots of land left bare. The division of labor is limited to family relations and the social structure is therefore its extension, with patriarchal leaders, members of the tribe and slaves. With the increase in population, and rise of wants that result from this in the further stages of ownership, these dynamics gradually change (11). The second type is ancient communal and State ownership which occurs when tribes that had been formed in the earlier stage are brought together either through mutual agreement or war. Slavery and communal ownership are still present, although in this stage the first signs of private property are apparent; private property is seen as subordinate and abnormal next to communal ownership. All social structure is built upon this communal ownership, citizens stay in their communities of private communal land because they only have authority over their slaves under these circumstances (11). The division of labor is more developed in this form and, with it, the first sign of town and country, and industry and maritime commerce antipathy begins. The town represents the bulk of the population living together, accumulating capital through production and thus satisfying wants, while the country comes to represent isolation and separation; it is the first great division in material and intellectual labor. Next to this, two distinct classes have formed in this stage, that of the citizen and that of the slave (12). The third stage is feudal or estate property, forming not from the combination of tribes into towns like the earlier stage, but instead coming out of the country. The population at this time is not concentrated in one place, nor is there a significant increase in population. The extensive conquests of the Romans arranged the stage for the isolation characteristic of feudal property. There are still elements of tribal and communal ownership at this stage, but now the producing class is not the slaves, but the peasantry. There is a marked difference between feudal ownership in towns and in the country; while in the country property is completely communal for the peasants, in the town property is generally defined by each individual's labor. Skilled laborers in towns, in order to protect themselves from competition, formed guilds where the slowly accumulated capital led to the formation of journeyman and apprentice, a hierarchy that resembled that of the country. In the beginning of this stage, the journeyman is both the producer and merchant of his product, and complex divisions of labor have yet to be formed (12). The development of industry began when the towns formed on feudal property began to trade amongst each other, sharing new tools and information. In this way the

!47 first separations between production and commerce began to take place. From here a division between production in towns forms as well; each town is slowly developing its method of production, each of them, ‘exploiting a predominant branch of industry’(17). This is a significant change because the technological accumulation present in the town is no longer as fragile, as any force, whether it be wars or natural disaster, can no longer destroy everything that had been developed in that community The rise of manufacturing began with trade between towns as industry began to grow out of the guild system and into larger branches of production. Manufacture is dependent on a large population as well as an accumulation of capital, two factors that were growing during this period, population in the countryside, and capital in the guilds. Weaving was the first and most important branch of production during this period, starting in the countryside with peasants as a subordinate to their agricultural occupation; it quickly grew with the introduction of cross town commerce. In this way a new class of weavers was formed, producing fabric both for domestic use in their homes and to be traded in the market. The lack of skill required to weave with even the most primitive machine prevented the formation of guilds in this sector, and it was therefore practiced in the countryside more than the town, causing weaving villages to be hubs of productivity (18). It is in the beginning of industry that the first steps into complex divisions of labor, and therefore the basis for the capitalist form of ownership, begins to form. The class relationship between journeyman and apprentice was primarily patriarchal, while the new relationship being formed in places of manufacture was that of worker and capitalist. Feudal relationships begin to break apart, both with the development of a new class of capitalists, as well as the gold and wealth from commerce that comes about through the discovery of America and new trade routes (19). The local feudal market became a world market, and with it an intensified competition between nations for increased productivity and capital. In the first part of this period, export of gold and silver is banned, allowing for the growth of a bourgeois manufacturing class in each country; new class relationships arise, worker-capitalist relations slowly take over the journeyman-guild (20). The creation of a world market, with England in the lead as the country with the largest concentration of trade and manufacture, led to the demand for production that could not be satisfied with the industrial force that was present. It is this demand that

!48 opened the way for the capitalist form of ownership, the fourth stage in the history of private property relations. The development of big industry led to freedom of competition, even when limiting measures were put, the lessening of the power of trade, turned all capital into industrial capital, and increased both its circulation and centralization (21). The breaking down of the complex and layered class system of feudal ownership was brought about by this move to capitalist ownership. As with the abolition of journeyman-guild relations, the distinction between capitalist and landowner was also done away with, as were any other classes that were not based on the exchange of commodities; only the working and capitalist class remain (23). The aristocratic method of ownership and consumption, consuming only what is there and leaving the rest to the peasants, is replaced by the capitalist form of extracting as much possible profit from the land (24). This last stage of ownership is the one most essential in understanding Marx’s interpretation of the commodity and the influence the division of labor has on its production. The assumptions Karl Marx makes in his book “The Capital” are based around the class relationships that have been formed in a capitalist economy. It is safe to say that although the anthropological and historical inferences that Marx makes on pre-capitalist societies may no longer be as relevant as they once were, his analysis of the capitalist mode of production and its social nature still hold true, as will be seen in his breaking up of the commodity into its fundamental parts. THE NATURE OF THE COMMODITY AND ITS RELATION WITH THE DIVISION OF LABOR In the breakdown of the commodity, Marx goes beyond looking at what is material and rejects the assumption that all that can be known of an object is apparent through the observation of its physical form. In order to understand the hidden features of the commodity, one must analyze the dialectic between its fundamental parts : the use-value, the exchange value, and the value (David Harvey, A Companion to Marx’s Capital, p. 37) They are knit into each other, it is impossible to look at value without exchange value and exchange value without use value The use value is the surface of an object, what can be held, measured and used physically. It is called use-value because it must be useful, if an object is unable to satisfy a want, i.e. have a use, then it has no value and can therefore not be a commodity. In the same manner one can have an object that has a use value but is not a commodity, an example being vegetables that one grows in the garden for oneself; these are not brought out into the market and given an exchange value; therefore they

!49 are not considered commodities (22). An important detail to remember is that the value of a commodity has no relation with its use-value, it is impossible to determine the value of an object through physical observation. `The exchange value becomes apparent once a commodity is exchanged for other commodities in the market. If the use value represents the ‘quantitative’ side of the commodity, the exchange value represents the ‘qualitative’ (Andy Blunden and Brian Baggins, Encyclopedia of Marxism, 1999); it is the value that is behind the price of the commodity. The price of a commodity is determined by each commodity’s relation to the universal equivalent, the commodity that is used in order to determine price in the marketplace. During Marx’s time, the universal equivalent was gold, itself a commodity but alienated from its use-value in order to be used as the representation of value for all other commodities (31). If one is to trade a commodity for another, one is making the assumption that they contain an element that makes them equivalents in some way. Take for example the exchange of x number of shoes for y number of fabric, the use values of each of these commodities are completely different, and yet by accepting one as payment for another, one is assuming that they are equivalents in some way. One does not exchange shoes for fabric because they are of the same color or texture; they are exchanged because they are both produced using human labor. The underlying value of a commodity, the basis of its price in the market, is defined by the amount of abstract labor that has been put into its production. This is an essential assumption for understanding Marx as it is the basis of every conclusion that is made in his writing, value in a capitalist economy is congealed abstract labor (25). To return to the dialectic relationship between the elements that make up a commodity, once the definitions of each have been put forth it is now easier to understand why one cannot survive without another. Supply and demand affect the different fluctuations of price in the market, but they do not explain why it is possible to exchange two commodities for each other, even when they have no similarities whatsoever in terms of use-value (42). The expansion of the market economy, the growth of private property and rapid increase in production have led to the development of a society that determines value depending on the amount of human labor an object contains; this is dominant characteristic of the capitalist form of ownership. Within this method of value judging all labor is diminished to simple labor, the only difference being the quantity of simple labor that is present in a commodity. Equations of equivalence use abstract labor as their currency of exchange, allowing no room for taking into

!50 consideration the different types of labor that may have been present during production. The naturalization of these value assumptions is what Karl Marx calls, ‘commodity fetishism’; when the price that is put onto a commodity is seen as a natural outcome of its use-value and is not seen for what it really is: a social construct. The division of labor is the relationship among individuals in the process production, a purely social phenomenon, and the commodity is the embodiment of this. Value is congealed labor time, it is the product of the division of labor and as value is dialectically integrated into the commodity, it is therefore completely social in nature. Perceiving the value-labor relationship as natural leads to the assumption that any other value relationship is impossible. When it is understood as social on the other hand, there is the knowledge that it is just a product of a specific phase in property ownership, and can therefore be changed (39). ALIENATION AND THE DIVISION OF LABOR The capitalist phase of property ownership contains two primary classes, the workers and the capitalists. It is in the capitalist’s interest to harvest from the worker’s labor the maximum amount of capital; in other words, the capitalist maintains his superiority through the exploitation of the worker’s surplus value. Surplus value is the labor that is beyond what is needed for a worker to survive; it is the amount of unpaid labor time that the capitalists use in order to increase their capital. The capitalist class is the owner of all private property as well as the means of production, the only thing that the worker owns is his labor and with it the wages that are paid to him in order for him to survive (Andy Blunden and Brian Baggins, Encyclopedia of Marxism, 1999). Man sustains himself through production, but with the complex division of labor present in the capitalist economy, he neither owns the means with which he produces, nor does he own the product of his labors. In Marx’s materialist dialectic, man realizes his full potential through the creation of material products, but when he is neither able to own the means or the end of his labor, he is only left with what was passed onto him from the animal kingdom, the ability to eat, sleep and reproduce. Man’s sells his labor, the only action that differentiates him as a species; in order to survive, he leads a dual life where he works in order to stay alive, and seeks to develop his personality out of work, instead of enriching it through work. The value expression alienates man from himself through diminishing all labor into abstract labor, stripping him of his means of developing a consciousness, and therefore of his identity (Shlomo Avineri, The Social & Political Thought of Karl Marx, 1968 p. 107). The complex division of labor is the reason the worker lacks any specific skill as he only produces one aspect of the commodity in the assembly line; this assures that he will not be able to make this produce on his own

!51 elsewhere and therefore gives the capitalist confidence that none of his capital will leave him (Marglin, 70). SHIFT IN SOVIET IDEOLOGY The economic reforms made immediately after the Russian Revolution in 1917 can be divided into three parts, War Communism, the NEP and the First Five Year Plan; during each of these periods, a definite ideological movement was present, a compromise was being made and productivity was given the upper hand to the ideals that had fueled the revolution. When analyzing the interpretation of Marxist theory in Soviet Russia, it is important to remember the difference between the dominant rhetoric, and what was actually being implemented in society, as these are usually very different. The death of Lenin, the threat and destruction of war, as well as the pressure to excel and become superior to capitalist powers, played substantial roles in this ideological movement. The goal of this paper is to show, through the observation of Soviet division of labor practices, how Soviet ‘communism’ was unable to break apart the labor relations that form the basis of Marx’s criticism of capitalism. The time-span between the starting of the NEP and the end of the Russian Revolution is one soaked in blood and loss. After taking Petrograd and Moscow during the October Revolution, the Bolsheviks found themselves in a difficult situation; what were they to do with the Menshevik soviets, and the non-Russian areas of the old Empire? Would the silencing of any voices of dissent for a proletarian dictatorship lead to a loss of support for them as a party? (Sheila Fitzpatrick, The Russian Revolution, 1994 p. 68) These were questions that were being asked by the Bolsheviks who had just won power, but they were not prioritized at the time because there was still a great hope for international revolution. Russia was not to be the only country to break through the chains of capitalism; the sparks of revolution were going to fuel similar uprisings in neighboring countries. For this reason the Bolsheviks never thought that they would need to create a nation state (69). Following the signing of the Brest-Litovsk peace agreement between Russia and Germany in 1918, a civil war started between the Red Bolshevik and the White Anti-Bolshevik forces in the country. The Reds believed this civil war was a class war between the proletariat and the capitalists, and saw their success in 1920 as the ultimate defeat of the capitalist ruling class (70). It was the first time the Bolsheviks were ruling a country, and characteristics of later Soviet rule, like fear of imperialist intervention, and resorting to aggressive tactics when faced with an unforeseen situation, were established during the two years of Civil War. The Bolsheviks at this time

!52 were a minority rule with primary support from Russian Workers who did not care whether they used aggressive tactics to show authority or crush opposition (71). It is important to understand that the Civil War was in no way a surprise completely independent of Bolshevik activity. The communists were well aware that they would be faced with a backlash when they took over Moscow and had been using armed military tactics since the beginning in order to prepare for this (72). Throughout the Civil War (1917-1922), the Russian people were faced with fierce terror from both the White and the Red forces. The Bolsheviks aggression was more ideologically based as Lenin and Trotsky believed in order to sustain any form of government, all other classes must be coerced, even if it be through random punishment unrelated to guilt in order to intimidate a group or the whole population (76). The Cheka (All-Russian Extraordinary Commission for Struggle against Counter-Revolution, Sabotage, and Speculation) initially formed in 1917 in order to control the rise of crime after the October Revolution, helped incite terror through mass arrests and by taking hostage anyone who was suspected of supporting the Whites (77). The bulk of the policies made during these years of civil war are called ‘War Communism’ and it is still unknown whether these were implemented as the first steps towards communism or as the immediate reaction to the war in the country. The long-term goal was to do away with private property and the free market and to distribute goods according to everyone's need; to begin this the Bolsheviks tried to nationalize all industry, put into place collective farms, and do away with the money economy (80). All industry was nationalized by 1920; in theory this included small-scale industry, but when it came to practice it was impossible to prevent the activity of all small private industry. Wholesale trade was nationalized, and the Bolsheviks tried to replace the free trade of basic food with a government distribution network, both as a first step towards need based distribution, and in order to combat the bread shortage that was present during the Civil War. The peasants were reluctant to give their grain to the government as there was nothing on the market to buy and they were very suspicious of the Bolshevik officials because of their ‘strange ideas’ regarding ownership of goods. Peasant’s lack of cooperation forced the Bolsheviks to implement policies of forced grain recruitment, sending army officials to villages in order to collect grain as well as trying to create class conflict between the wealthy peasant ‘kulaks’ and poorer peasants (80). The government had miscalculated how developed the countryside was, and the second method was unsuccessful because class conflict between peasants with different amounts of capital only begins to become present in

!53 more developed rural capitalism (82). The management in factories was split between worker management and managers appointed by the state who would follow orders from a central committee; until the beginning of NEP some factories were controlled by a worker’s committee and others by managers (81). Piece-based payment was used in factories during War Communism in order to keep productivity high even though the workers were against it due to its in-egalitarian nature (80). The Bolsheviks saw the mir communes, the primitive peasant village community where the land was worked all together and the harvest shared, as preventing rural capitalism from developing and made it a goal to replace them with collective farms. The peasants believed the mir was the only institution that was their own and thought the revolution would finally allow them to live in peace in their mirs without government oppression. In order to win over the peasants during this period the Bolsheviks distributed the land on the previous landowners and only made collective farms on large pieces of state land (83). The true shift in Soviet ideology began in the next step after the end of the civil war, during the establishment of the New Economic Policy (NEP) in 1920. Russia had just come out of the First World War and a civil war only to be faced with a massive famine caused by the peasants refusal to give grain and disorganized distribution of goods that killed more citizens that the casualties of both wars combined (93). Until this point, a firm ideology had not been established when it came to how to deal with the division of labor; this can be seen in the management of the factories, for there was no universal method of dividing and controlling labor in the industry. During the NEP, the formal policies implementing forced grain requisition, and the ban on free market and private industry were removed. All forms of dissent were silenced, marking the government's first shift away from the proletariat after the revolution; the focus was on maintaining peace in the party and in the country (95). With the death of Lenin in 1924, Stalin established himself as the new leader of the Bolshevik party and ended the NEP. Stalin shifted the focus in industrialization by putting into place the groundwork for the next plan: ‘Socialism in One Country’. With the failure of the attempted revolution in Germany extinguishing any hopes for international socialism, the time had come to ask the question of where Russia was going as a nation. The beginning of the NEP was characterized by attempts to put the country back onto its feet after two back to back wars that left many cities in ruins and a large number of factories abandoned with the machines still sitting inside (Fitzpatrick, 95). The economy was at an all time low and no country was willing to help Russia financially to

!54 improve its situation. The move towards a socialist economy was slowed down by the reopening of the market and private industry, as well as a replacement of the grain requisitioning policy with a money tax; these reforms were paired with an intense silencing of any political dissent that was present in the country, even that of the proletariat. Improvements in living were immediate but came with much criticism as many of the engineers and factory owners from the Tsarist period were still running the industrial plants due to the lack of an educated working class (Kuromiya, Stalin’s Industrial Revolution, 1988 p. 12). Under Stalin, the silencing became more aggressive and involved intense purges of both the party leadership and the citizen population, most notably through mock trials like the Shakhty trial. It is possible to go into great lengths on the destructive behavior of Stalin during this period, but for the sake of this analysis only the Shakhty trials will be addressed for they mark a definite turning point in how the government treated the working class (78). The rapid industrialization of Russia during the 1920’s was a trial and error process. The amount of funds that would be needed in order to build a new factory was frequently miscalculated, and many times the unsuitable equipment was bought with the intent to have the highest quality machines for production, eating up much of the already quite limited funds after the revolution (13). The Shakty trials involved the State Procuracy (section responsible for Soviet legality and held responsibility in prosecuting criminals) accusing a group of ‘bourgeois’ engineers and specialists of causing all the problems faced during industrialization. It was said they were trying to undermine the Soviets plans to become a socialist world power, thus also accusing them of working with capitalist powers (16). This was an open trial and given extensive coverage in the media, playing a huge role in Stalin’s propaganda against the wealthy old bourgeois class as well as reinforcing his claims that capitalist forces were making plans to overthrow the government (17). Following the engineers being convicted guilty, it was decided that all industry was to be restructured in order to create the basis for rapid industrialization (50). During the first part of the NEP, the main method of industrial management involved a the factory being run by two managers, a Red communist and a White bourgeois specialist, who was either trained to be an engineer or had experience running a factory before the Revolution. They were also helped by a trade union who usually shared certain managerial powers with them. After the Shakhty trials, it was decided to do away with this three person management system and replace it with one man management that stuck to the meaning of the phrase, one Red manager who was well educated in management and engineering and held all power (51). This would

!55 require a massive educational campaign ‘as nine out of every ten Communist managers did not have an elementary education, whereas the majority of engineers has secondary and higher educations’ (52). In this way, it was decided that one man management, with all decisions made by one individual designated by the party, would be implemented in order to speed up industrialism as much as possible. This is the first example of how the Bolshevik party chose increasing capital through industrialization over establishing new methods of dividing labor that were not alienating to the workers. For a period between the establishment of one man management after the Shakhty trial and the re-establishment a new version a few years later, management from below was tried; power was split between the workers and the management, both making decisions together. The goal of this change was to both uphold the revolutionary ideals in practice as well as prevent the manager from losing all sense of responsibility for his actions; the workers would simulate the market control present in capitalist economies that prevents managers from making wholly irrational decisions (60). The outcome of this change did not fit into the goals of industrializing Russia; the interests of the workers did not coincide with those of their managers who were ordered to produce as much capital as possible with the least amount of trouble and expense. The rise of worker strikes and insubordination from this clash of interests led to the re-establishment of the one man management (****), this time with an added superficial feature that allowed the workers to give their opinions, but no longer gave them any power in management (77). In synch with the formation of one man management, there was a movement from the division of labor characteristic of feudal property ownership into that of capitalist ownership in the industrializing Soviet factory. The worker body of this period was separated into two sections: old workers and new workers; the old workers were the skilled workers who were the founders of the revolution, while new workers were the young unskilled peasants who migrated into the towns in order to find work and who did not remember the revolution first hand (78). There was great antipathy between these two groups of workers as the old workers saw the new workers as the reason why their wages were dropping and their skills no longer as needed as they once were. The change in the Bolshevik ideology towards the proletariat whose satisfaction was once their primary goal is obvious from the putting aside of the old workers for more efficient methods of acquiring capital. The situation become such that at the Komsomol meeting of 1928 a new worker named Eliseev was put under attack because of a letter he wrote to a newspaper that wrote: “In my opinion socialist competition means ‘squeeze the last drops out of the workers’” (98). This is an interesting criticism to receive under a

!56 government that claims to be the embodiment of Marxian economic principles. CONCLUSION Unlike in a capitalist economy where various individuals seeking to accumulate profit led to the alienating practices of artificial divisions of labor, in the post-Revolution Soviet Union the government consciously decided to chose accumulating capital over changing the methods of division of labor. Although division of labor has existed much before capitalist ownership, the movement towards alienation was not a product of choosing the more efficient method of production, but was instead done to increase capital accumulation. Marx believed that the productive forces of a country will define the dominant social and ideological movements, meaning if exploitative practices are in place, then the ideology present is one based on the normalization of this oppression. Attempts to point to the Soviet Union as the failure of Marxist ideals is a faulty example because they did not even implement Marxian policies in their most basic form. No definitive attempt was made to change the capitalist value relations that were dominant; the need to surpass capitalist industry overrode the ‘worker’s cause’. The Bolsheviks were a group of revolutionaries with very high ideals but almost no administrative experience before the revolution; they were mostly young intellectuals or workers lacking primary education. It is not surprising that when the revolution happened and the Bolsheviks found themselves in a place of power, they were very confused as to how to continue, mixing up theory and practice in an attempt to both create the ideal society they had envisioned, and become a world power. The overwhelming pressure from the West to succeed alone was also a great hinderance to the implementation of their ideals. It can be said that the Russian Revolution was a step in the right direction, but when it came to the policies that were put into place, they were far from implementing Marxist economics, and were much closer to following the Marxian timeline of productive development. Although the Russians passed from the feudal to the capitalist stage in different way than the other European countries, they still went from the strict journeyman-apprentice division to a capitalist-worker relationship, replacing the appreciation for skilled labor with one for accumulating capital. A society whose method of production does not involve the alienating properties of the complex division of labor is yet to be formed, but it is important not to confuse the Soviet industrial model with an attempt to do this. Such an assumption could stunt any movement towards its creation through saying that it has already been done and failed

!57 from the fact that the Soviet Union fell in 1991. The Bolsheviks never succeeded in creating a socialist economy, nor did they succeed in making a working atmosphere that stopped the oppression of workers; through this analysis it can be said that they did not try very hard to do this either. It is important to note when looking at Marx’s history of the division of labor, his lack of acknowledging the effect gender relations had on the industrial revolution. He claims that the reason why weaving was more concentrated in the country than in towns was because of the lack of skill required to weave with a machine. The dominant reason why weaving was done in the country is attached to the closing off of communal land in England and the need for women to therefore become providers of wage to the household. Women used to collect many resources from nearby open plots of land, providing for the family with non-wage based subsistence. When communal land was closed off, families became much more dependent on wage earners, pushing women and children to start industry in the house as they did not have much access to anywhere else (Humphries 19). Further research could be done in order to look at how Russian history allowed for the Russian Revolution to happen and how the nature of the Russian peasant greatly affected both post-Revolution policies as well as the interpretations of Marxian texts in Russia during this time. There are no isolated events in history, in order to fully understand why egalitarian methods of division of labor do not yet exist, the evolution of capitalist ownership must be further analyzed.

!58 References Andy Blunden and Brian Baggins, Encyclopedia of Marxism, https://www.marxists.org/encyclopedia/ 1999 . Web. Avineri, Shlomo. The Social and Political Thought of Karl Marx. Cambridge, Eng.: Cambridge UP, 1969. Print. Friedrich Engels, and Karl Marx. The German Ideology. New York: International. Print. Fitzpatrick, Sheila. The Russian Revolution. Oxford: New York, 1994. Print. Harvey, David. A Companion to Marx's Capital. London: Verso, 2013. Print. Humphries, Jane. Enclosures, Common Rights, and Women: The Proletarianization of Families in the Late Eighteenth and Early Nineteenth Centuries. J. Eco. History The Journal of Economic History 50.01 (1990): 17. Web. Marglin, What do Bosses Do? Radical Interpretations of Economic History, 1974. Print. Kuromiya, Hiroaki. Stalin's Industrial Revolution: Politics and Workers, 1928-1932. Cambridge: Cambridge UP, 1988. Print. Marx, Karl. A Contribution to the Critique of Political Economy. New York: International, 1886. Print.


Chinese Economic Policy towards Ethnic Minorities Taha Hayat, Class of 2020 In recent years, China has become almost terrifyingly notorious in the West for its rapid economic boom. However, many ethnic minorities argue that this expanse of financial growth has only come to benefit the Han majority. While development is continuing within rural parts of China at an alarming rate, the ethnic groups that inhabit many of the areas still have yet to reap any economic benefits. While the Chinese government has generally held the position that economic empowerment of ethnic minorities is a top policy priority, many analysts argue that there is an ulterior motive of assimilation at play. In the 1980’s, the government passed the Liberalization Policy which was meant to relax restrictions on minority businesses. In addition, then Communist Party leader, Hu Yaobang, proposed granting Xinjiang and Tibet greater autonomy, transitioning the regional governments into eventually being at least 60% non-Han, and even appointing more non-Han people to party positions on the municipal level (Zang 148). The Minority Entitlement Policy was also passed; this was meant to increase minority access to education, jobs, and even birth control (Zang 150). Despite these policies, there was still a stark contrast between the overall GDP of minority regions, most notably the Western province of Xinjiang, and the GDP of Han-dominated regions of the country. In the early 2000’s, China attempted to rectify this disparity by establishing the, Great Western Development Policy, as well as by pouring billions of dollars into new urbanization projects. Over the course of the next fifteen years, the autonomous regions of Xinjiang, Tibet, and Guangxi would undergo continuous urbanization, yet to the continued disenfranchisement of the ethnic groups who call these regions home. As recently as 2010, the Chinese Census reported that over 80% of Uighur people still had low-paying farming jobs, as compared to less than half for their Han counterparts (The Economist). Many scholars are critical as to why these policies, as well as many others have continued to fail in empowering ethnic minorities. Some would point towards China’s motives in wanting to assimilate these populations rather than give them financial independence. It is also important to note that many of these policies targeted at autonomous regions like Xinjiang and Tibet still only benefit Han people. In 2010, nineteen Han municipalities were designated to provide financial, technological, and business expertise to Xinjiang (Zang 36). While this may seem like a beneficial exchange it is important to remember that most of these policies still ensure the region’s dependence on the central government in Beijing. A large amount of the funds allocated for Xinjiang were spent on transportation, education, and resource extraction. Many scholars have pointed out that all of

!60 these provided services are essential for facilitating Chinese administration of the region (Zang 37). Other scholars would argue that continued development in Xinjiang can never truly benefit the Uighur people as long as there is such a strong military presence to discourage separatism, and as long as Han people continue to immigrate into Xinjiang to take advantage of the new jobs produced from urbanization. When we examine the economic situation in Guangxi, we see a similar situation. While Guangxi, as a region, has also benefitted from strong urbanization and development. This has still mainly left out the indigenous Zhuang people who, until recently, were the majority ethnic group of the region. Guangxi, boasting the highest GDP amongst the autonomous regions, has been considered an economic success on behalf of the central government (Kaup 151). However, just like Xinjiang, the central government does have a crucial role in administrating the region as all of the roads, railroads, and telephones were built to keep it more interconnected with large, Han-dominated, port cities (Kaup 151). Just like Xinjiang, the important thing to remember about Guangxi is that there is still an incredible wealth disparity between the eastern and western parts of the region, which upon further analysis can be tied to the ethnic distribution. Most Zhuang people live in very isolated communities in the western part of the region as opposed to wealthy Han people who occupy urban centers in the East. In addition, Eastern Guangxi has been involved in foreign investment with other countries, while Western Guangxi has been discouraged from it (Kaup 165). In recent years the Chinese government has become more adamant about shifting funding from Guangxi altogether. This is most likely because the government doesn’t see a problem in Han people being the main receiver of financial benefits in the region, as long as this doesn’t spark any separatist movements among the indigenous Zhuang. However, as Zhuang people are becoming more politically conscious, there has been a genuine desire for the central government to do more. Policies from the central government are no longer taken at face-value. In May of 1988, the government redistricted the economic zones for Guangxi and while this may look harmless on the surface, it had the specific targeted goal of placing more economic emphasis on the Han-dominated eastern part of the region as opposed to the western part (Kaup 164). Like the Zhuang, many minorities are only recently starting to recognize the “denationalization of nationality” de facto policy of the Chinese government, and have been trying very hard to fight against it (Kaup 165). One group that has been touted by the Chinese government as a success story for minority empowerment are the Yi people (Al Jazeera). While most Yi people still occupy lowpaying farming jobs, most, unlike the Uighurs or Tibetans, hold very favorable views of the Chinese government. In addition, most Yi people are able to speak both their native language

!61 and Mandarin, a big victory for the central government (Mackerras 131). Still, most would hardly call this a success story since Yi still face significant rates of cultural loss, and while their economic situation is most likely better than that off than that of the Uighurs or Tibetan; it still is by no means ideal. In conclusion, China’s economic policies have only served to exacerbate the problems already faced by ethnic minorities. While most of China’s economic policies towards its more rural regions have been very development-focused. It is important to remember that these policies are not always as well-intentioned as they may seem to be. There is a significant distinction between regional development and minority development that is not made clear in any of China’s economic policies. Another main problem is that while economic policies targeted towards Xinjiang and Tibet should, in theory, bring more stability to these regions, they have only done the opposite by further inflaming, already tense ethnic tensions between indigenous groups and Han immigrants. Going forward into the future, China must address the problem of economic disempowerment by giving more economic autonomy to its five autonomous regions (including greater foreign trade capabilities) instead of expecting them to be vessels of resources for the rest of the country. Finally, while economic empowerment will definitely ease separatist movements in regions like Xinjiang, China still needs to address the fundamental problem of the fact that it is trying to simultaneously integrate numerous regions of the country into, “one China”. When one considers the vast cultural, ethnic, and societal differences between all of these fifty-five minority ethnic groups, and the fact that they occupy more than 60% of the geographic land of China (Mackerras back cover); it becomes hard to imagine how China, as a nation, is supposed to keep itself united without giving greater self-determination to these fifty-five ethnic minorities. Zhuang Leadership member statement: Minority interests are inevitably sacrificed when natural resources are extracted without market price compensation. For years now, we’ve been unilaterally chanting the [official] slogan “Han and Minorities Cannot Exist Without One Another.” In a system which is not based on the free exchange of commodities, however, rather than saying “The Han and Minorities Cannot Exist Without One Another,” we should be chanting “The Han Cannot Exist Without the Minorities’ Natural Resources and the Minorities Must Just Sit Back and Supply All With No compensation.” (Kaup 167)


References Zang, Xiaowei. Ethnicity in China: A Critical Introduction. , 2015. Print. Mackerras, Colin. China's Ethnic Minorities and Globalisation. London: RoutledgeCurzon, Taylor & Francis Group, 2006. Print. Kaup, Katherine P. Creating the Zhuang: Ethnic Politics in China. Boulder, Colo: L. Rienner, 2000. Print. “Why China's ethnic minorities are being left out of the economic boom.” Youtube, uploaded by The Economist, 21 January 2015, https://www.youtube.com/watch?v=4SEqZc5btW0 “China's challenge to unite its ethnic groups.” Youtube, uploaded by Al Jazeera English, 28 September 2009, https://www.youtube.com/watch?v=DvGPWMGGdsc


Gryphon Capital Management: A Leader’s Reflection Matthew Gerak, Class of 2017

Over the duration of my time at Sarah Lawrence College, Gryphon Capital Management (GCM) has been a wonderful support system for me. Never did I think that I would find a group of people that would be so helpful in terms of my academic career. When I think back to Sarah Lawrence, I will always have fond memories of the moments I shared with this group. Gryphon Capital Management was started when I was a sophomore along with two other students. We did not really have a plan or goals in terms of the creation of the group, but we did share a common interest in the economy and financial markets. In GCM’s first year, the three of us would meet on Sundays and discuss events and news from the previous week. To this day, I am good friends with both of these students who I started GCM with. We have gone through ups and downs together and it has only allowed for us to become closer as friends. During its second year of existence, GCM gained a couple new members that are still part of the group today. We became somewhat more formal, but still lacked commitment and responsibility. We had a total of six members, but we were lucky to have three or four there on Sundays for the meetings. Towards the end of the year, I started to see some more excitement from members and that has definitely transitioned into this year. At the end of the year, the group took a trip to BJ’s restaurant to enjoy some food and check out how they ran their business. That was the first time I got to spend time with the whole club outside of meetings and it was a lot of fun. The food was enjoyable and we all fought over the last pieces of their infamous pizza cookie hybrid Pizookies, which I highly recommend trying if you ever find yourself at a BJ’s Restaurant. Today, GCM has an upwards of fifteen members and things have changed drastically. Everyone in the club is committed and responsible, demonstrative great initiative towards the work and being incredibly supportive of each other. We have a great group of people which has smoothly transitioned to a great learning environment. It will be difficult finishing up my time as a member of this club but I can definitely leave happily knowing how far this club has come from its start and the wonderful people I have met along this journey.

Profile for Gryphon Capital

SLC Economic Review, Vol I.  

Founded at Sarah Lawrence College, The SLC Economic Review was created in the Spring of 2017. A subsidiary of Gryphon Capital, it is a stude...

SLC Economic Review, Vol I.  

Founded at Sarah Lawrence College, The SLC Economic Review was created in the Spring of 2017. A subsidiary of Gryphon Capital, it is a stude...