The History of Money: From Gold to Cryptocurrency
Guns and Butter
Throughout history, countries have had to decide between feeding the people or protecting them. But there’s another war being waged in the background. A hidden war. A financial war. And not one in 100,000 realises it’s happening.
If you look at the number of cryptocurrencies that have come to market since 2013, it's easy to be overwhelmed.
Most commentators suffer from the curse of knowledge and don’t understand that outside of the geek tech community nobody knows what they’re talking about.
What if I told you there was a way to save yourself from the frustration and be able to pinpoint with some accuracy new coins and tokens that have the best chance of being wildly successful?
The good news is there is...
The most important factor in the cryptocurrency space is to be able to recognise what problem a coin or token solves. And to be able to do this it’s an advantage to understand the timing of the creation of Bitcoin and the underlying technology it uses to solve these problems.
It’s also useful to know how governments control the value of money and how they make sure you have no control over the decisions and undemocratic tactics they employ.
To understand Bitcoin, the timing of its creation, and the problem it was created to solve, let’s look at how money has been controlled, devalued and manipulated...
London January 3, 2009: In reaction to the financial crisis, an anonymous avatar appeared with a solution.
His nom de plume is Satoshi Nakamoto, and he, she or they (nobody really knows) gave us Bitcoin.
In October 2008 Nakamoto released a white paper describing the Bitcoin digital currency.
The “Genesis” block of Bitcoin has a time stamp of 18:15:05 GMT. The block is unlike any other because it does not have a reference to a previous block.
Nobody can say for sure why Nakamoto developed and released Bitcoin but the text message embedded into the first mined block of Bitcoin gives us a clue.
“ Chancellor on brink of second bailout of banks”
The Times 3 January, 2009
What was the catalyst for the motivation to develop a new form of exchange?
To answer this, we need to ask the question: What is money, and why does it have value?
Until recently, the value of money was based on gold. There have been many different forms of gold standard but let’s start with the international gold standard as it was in 1929.
In 1929 the price of gold was fixed at $20.67 an ounce.
During the Wall Street Crash the US stock market lost 89% of its value between 1929 and 1932. As the panic spread, this caused massive imbalances in global trade and led to countries opting out of the international gold standard. The first major country to opt-out was the United Kingdom. The British pound fell by 30% against the US dollar over the following eight weeks. Other countries soon followed.
Countries opting out of the gold standard had the effect of making the US dollar strong against the other major currencies and this, in turn, led to the US importing deflation, (US imports became cheap, and US exports expensive), from the rest of world.
This caused deflation to take hold, and the great depression was born.
In March 1933 a new American president, Franklin D. Roosevelt (FDR), was sworn in. Two days after coming to power FDR used emergency powers to implement a bank holiday. All the banks were forced to close.
During the bank closure, the emergency act allowed the US central bank to make loans to banks equal to 100% of any government securities they owned and 90% on any cash and cheques. (This was before bank deposit insurance existed)
And when the banks reopened instead of a panic and a run on the banks, as some had predicted, people lined up to deposit the cash they had been hoarding since the 1929 crash. In one bold move, public confidence in the banks had been restored.
FDR then had to solve the US deflation problem. One month after saving the banks, he issued Executive Order 6102. This order made the ownership of gold by US companies, and citizens illegal. Everyone was required to deliver their gold to a Federal Reserve Bank before the 1st May 1933.
The fine for disobeying? USD 10,000 (a massive sum of money in 1933) or ten years in prison.
FDR confiscated US citizens gold and paid the going fixed rate price of $20.67 per ounce.
What he did next may shock you.
Over the next ninety days, FDR, after paying $20.67 per ounce, increased the price to $35.00 per ounce.
This had the effect of devaluing the US dollar by 70% against gold and other currencies because of the international gold standard. This brought US dollar valuation back into line with other currencies, forcing deflation out of the system.
Less than six months after attaining power FDR has restored confidence in the US banking system and solved the US deflation problem.
You had your savings reduced by 70% against the only real source of money. Gold.
New World Order
In July 1944, the world powers met at Bretton Woods in New Hampshire to agree to the creation of a new world order.
The United States was emerging from World War II as a global superpower, and at Bretton Woods, an adjustment was made to the international gold standard.
The US dollar would be fully exchangeable for gold at the fixed price of $35 per ounce. Other currencies would be indirectly fixed to the price of gold through fixed rates against the US dollar.
This meant that countries could use their US dollar reserves to buy gold.
Bretton Woods worked well for a while but during the 1960’s cracks started to appear. In 1965 French president, Charles De Gaulle, redeemed US dollar reserves for gold. Other countries followed, and this meant the US was losing a large percentage of its gold reserves.
On Sunday, August 15, 1971, US President Richard Nixon shocked the world by announcing the United States would no longer redeem US dollars for gold.
Between August 1971 and March 1973 global exchange rates entered a period of volatility but eventually a solution, brokered by the International Monetary Fund, was found.
In March 1973 currencies began to free-float against each other.
From this date forward, the value of money is based not on gold but nothing.
And what happens to a currency’s purchasing power when it’s based on nothing?
Oil for Dollars - The Petrodollar Agreement
Money based on nothing except government regulation and the law is known as Fiat currency. Fiat is a word derived from Latin “It shall be” or “Let it be done.” For countries to allow their foreign reserves to free-float against the US dollar, they needed to trust the United States.
To underwrite this trust, the US did a deal with Saudi Arabia.
The United States promised to protect Saudi Arabia’s national interests and security.
Saudi Arabia would price and sell their oil exclusively in US dollars.
And by 1975 all the OPEC members had signed up to sell their oil only in US dollars. And in return, the United States provided them with weapons and military protection.
This move ensured that all nations would need to purchase US dollars because all nations need oil. And to buy it you first need to exchange your currency for US dollars.
This is how the US dollar became the global reserve currency. This is how money became based on nothing but trust. Trust in the United States, and trust in the US dollar as a haven for international currency reserves.
From the early 1980’s demand for the US dollar was high. The United States was thought of as a safe haven for capital inflows. When demand for anything outstrips supply, prices go up. This had the effect of a strong US dollar relative to other currencies. A strong US dollar means weak commodity prices because commodities are now all priced in the global reserve currency — the US dollar, and this keeps inflation under control.
When inflation comes into the system, the US central bank can print more money and overwhelm the demand. It can do this at will because money is no longer based on gold reserves. This is how global inflation is kept under control.
Spanner in the Works
Globalisation. The world economy is an interconnected web of global supply chains. And when the financial crisis hit in 2008, its effect spread like a virus through international markets.
The global financial system was stressed to breaking point in 2008. Emergency measures to avoid the total collapse of international markets included bailing out the banks with the Troubled Asset Relief Program or TARP.
Exacerbating the problem was the competitive edge China has on the rest of the world by having a massively undervalued currency due to a fixed peg to the US dollar. And the Sovereign Debt crisis in Europe when Greece defaulted on its debt.
Something needed to be done.
Central banks around the world turned on the printing presses. They called it Quantitative Easing (QE).
The United States used QE as a delivery device to export inflation to the rest of the world. The US needed a way to make Chinese goods less competitive. China’s currency, the Yuan, is pegged to the US dollar at an uncompetitive rate.
By printing US dollars on an industrial scale, this money can find its way to China through trade surpluses and capital inflows looking for a higher investment return. As US dollars flood into China, the Chinese central bank was forced to print more Yuan to maintain their fixed peg to the US dollar.
The key is this: there was more slack or spare capacity in the US economy than in the Chinese economy. The US Federal Reserve bet that the slack in the US would absorb the money being printed without causing inflation to get out of control in the US. However, the Chinese economy had little excess capacity to handle the corresponding amount of Yuan they were forced to print as newly printed US dollars flooded in. This caused inflation to enter the Chinese economy. Chinese exports became more expensive and made the United States more competitive.
Quantitative easing is money printing on a truly enormous scale. How enormous.
In simplistic terms, QE pushes up the price of government bonds because the Federal Reserve buys government bonds from financial institutions to underwrite the newly printed money. This, in turn, drives down interest rates and interest rates are directly related to the price of the dollar. QE was designed to weaken the value of the dollar. Your dollar.
If a Dollar Was a Second
Deficit spending is when purchases exceed income, and when government spending exceeds the amount of money the government brings in it increases the budget deficit. Budget deficits add to the national debt. The national debt, also known as sovereign debt is how much a government owes. And the United States owes a lot.
United States national debt is now over 21 Trillion dollars.
This is such a large number that it’s difficult to compare it to anything and quantify.
Let’s convert a US dollar into something we can quantify.
Let’s covert a US dollar into a unit of time. A second.
In 1980 just before Paul Volker and President Reagan created the conditions for turning the US dollar into the internationally excepted global reserve currency US national debt was 800 billion US dollars.
1980 - $800 Billion converted into Time (seconds) = 25,350 years
2018 - $21 Trillion converted into Time (seconds) = 665,450 years
US National Debt is growing, since 1980, at a compound growth rate of 5.9% (inflation adjusted)
If you compare the size of the US economy from 1980 to 2018, it grew from 2.86 Trillion in 1980 to 18.6 Trillion in 2018.
The US economy is growing, since 1980 at a compound growth rate of 2.03% (inflation adjusted)
This means US national debt is growing at a compound rate of 3.87% normalised against the size of the US economy.
Using the Rule of 72 (back of the envelope math), this means that 72/3.87 = 18.6
From this, we can say that US national debt, growing at an annually compounded rate of 3.87% relative to the size of US economy, will double every 18.6 years.
You can see the increase in US debt to GDP is not sustainable.
And this is a problem.
Guns and Butter
Usually, deficit spending boosts the economy. The federal government pays for defence, health care, and construction. Governments contract with private companies and they hire employees. All this spending and wages feed back into the economy.
Something is not working.
As a countries Debt to GDP ratio approaches 100%, holders of the debt can become concerned the country does not have the income to pay the debt. When this happens, the creditors demand more for underwriting the risk. And if taken to the extreme this can cause not just inflation but hyperinflation. And this can obliterate wealth.
Enough is Enough
Gold confiscation and revaluation, quantitative easing, and budget deficits; increased sovereign debt risk. We live in a democracy, but history shows that governments can and do take undemocratic actions that directly affect you.
At 18:15:05 GMT on the 3rd January 2009 Bitcoin was released to the public as open source software in reaction to the misdeeds of the past by the people who control the value of money.
Bitcoin is an attempt to re-democratise the control you have over your assets. It has no central authority, and nobody owns it. No central authority and giving you complete control of your assets is something that makes governments very nervous.
In the next article, we’ll discuss the perfect storm that’s setting up blockchain technology to enter the global stage and into your life.