History is filled with failed attempts to establish new currencies…

The turmoil surrounding cryptocurrency often brings to mind the 19th-century German play Faust. In Goethe’s famous work, the devil Mephistopheles entices an emperor with the tempting promise of limitless wealth through the creation of paper money.

The emperor enthusiastically adopts this revolutionary idea (unheard of in the era the play depicts), and the magical wealth produced by paper money momentarily restores prosperity to his struggling empire.

Yet, what appeared to be an endless source of value swiftly proves to be an illusion. A combination of misunderstanding and hype leads to moral and economic decline, plunging the empire into chaos.

This story parallels our current circumstances with digital currencies. Many engage with them without a comprehensive understanding of their operations, sometimes to their financial peril.

History warns us against assuming that currency systems inevitably improve. In reality, new monetary systems don’t always flourish, and their transitions can often be slow and fraught with difficulty.

Coins and tokens have been in circulation for over 2,000 years, continuing into the 19th century when paper money finally became dominant. Rather than a smooth, irreversible shift from coins to notes, countries frequently oscillated between both systems.

Historical attempts at using paper money in 14th-century China, 17th-century Sweden, and 18th-century France, among others, were notably unsuccessful.

Examining these troubled experiences reveals that social divisions significantly increase the vulnerability of shifts to new currencies.

For example, during the American War of Independence, a currency named the “continental dollar” was introduced in 1775 but was shortly abandoned due to mismanagement and misunderstandings, further intensifying political tensions between supporters and opponents.

Similarly, in the 1750s and 1760s, the Swedish government issued non-redeemable paper money to pay off its war debts. This led to rampant hyperinflation, coinciding with severe social rifts and resulting in political turmoil.

In 1789, at the dawn of the French Revolution, a paper form of government bond was launched, which quickly lost its value. By seven years later, the “assignat” had become nearly worthless.

Britain’s experience was relatively better, as discussed in my book *The Age of Paper*. Its move away from the metal standard in 1797, prompted by financial pressures during the Anglo–French war, did not lead to a collapse of its paper currency.

Nonetheless, the paper-based regime eventually ended in 1819, a year marked by fierce class struggles, culminating in the Peterloo massacre, where at least 18 individuals were killed and hundreds injured by cavalry at a peaceful rally advocating for democratic reforms. Public sentiment shifted against Bank of England notes, which became symbols of economic hardship and political oppression.

Eventually, Britain followed the path of other nations, reverting to a conventional monetary system grounded in the tangible value of precious metals.

These instances of faltering paper currencies—and there are many more—highlight that the widespread acceptance of a currency fundamentally relies on shared values and societal cohesion. Paper money thrives when individuals believe in its value, acknowledging that it has been valued and accepted by others in the past and will continue to hold worth in the future.

Without such mutual trust, the rise of a piece of paper as a reliable medium of exchange becomes highly unlikely. Once confidence diminishes, currency depreciation typically ensues.

Cryptic currency

In the 21st century, cryptocurrencies challenge the conventional understanding of money as something valuable—or at least something tied to a tangible asset like gold and managed by a credible central authority.

Cryptocurrencies exist exclusively within the domain of blockchain technology. Their value is created and sustained not by central banks, but through complex computer algorithms.

For many, these abstract computational processes make cryptocurrencies as mysterious as Mephistopheles’ dark magic in *Faust*.

Despite this, supported by Donald Trump’s firm advocacy, cryptocurrencies are seeing a surge in popularity. This trend may be further propelled by ongoing deregulation that could diminish transparency requirements and weaken consumer protection measures.

The increased popularity aligns with the US government’s apparent strategy to devalue the dollar on the international currency stage, aiming to boost US exports by lowering the prices of American products abroad.

Such changes could lead to substantial shifts in the global monetary landscape. As the value of the US dollar declines and regulations around cryptocurrencies soften, countries and investors worldwide might be encouraged to diversify their asset portfolios and increase their cryptocurrency investments.

However, a combination of social fragmentation and rapid growth may not bode well for the future of cryptocurrency. Instead of solidifying its role as a dominant payment medium within a new decentralized framework, history suggests that its swift advance in a divided society may precipitate its own decline.

Hiroki Shin, Associate Professor of History, University of Birmingham

This article is republished from The Conversation under a Creative Commons license. Read the original article.