Money as we know it today
Different methods of exchange have been used since the dawn of mankind, but it was not until the 18th century that London jewelers began to store their customers’ precious metals in their vaults. The client made the deposit and withdrew with a certificate of the amount of metal deposited. Hence, the denomination of the currency: the pound.
Over time, when it came time to make a payment, instead of going to withdraw the gold, customers began to transfer the certificates.
Thus was born the fiat or fiat currency, based on trust. People accepted these papers issued by jewelers, not because of their intrinsic value, but because they were confident that they represented gold deposited in a vault.
Because customers never removed all of their gold at the same time, jewelers found that they could issue certificates worth more than the gold in their vault. And so the fractional reserve system was born.
Thus were born modern banking systems, with banks as private issuers of currency.
Governments seize the currency
For many years, the issuance of currency was mainly carried out by private banks. In the 19th century, after a series of banking crises, the idea of centralizing the monetary issue in a single agent gained momentum.
In 1844, the Bank Charter Act assigned that monopoly to the Bank of England. In 1848, France followed the same path. In 1913, the United States did the same with the creation of the Federal Reserve.
Interestingly, a century earlier, at the time of the passage of the Constitution, some of the Founding Fathers of the United States such as Thomas Jefferson and James Madison had fervently opposed the state monopoly on monetary issue.
What happened to the gold
At the end of World War II, delegates from 44 countries met at the Bretton Woods conference to design a new international monetary system.
The objective was to build a stable system that avoided the devaluations and inflation of the interwar period. The Bretton Woods system stipulated that all currencies would have a fixed exchange rate against the dollar, which in turn would have a fixed exchange rate against gold.
The Bretton Woods system lasted almost three decades, during which the dollar, backed by the gold reserves of the United States, became the dominant currency of the international system.
In 1971, Richard Nixon canceled the convertibility of the dollar for gold.
The Dollar is no longer backed by gold
Since 1971, the dollar has not been backed by gold. So when someone asks about the backing of bitcoin, we might as well ask again: what is the backing of the dollar?
For decades, the dollar has had no backing other than the belief in “faith and credit” of the United States government.
Money is a relationship of trust. When we agree to exchange our jobs or assets for papers with the faces of dead presidents, we trust that other people will accept those roles. And this implies a confidence that the government will not print an unlimited quantity.
The gold standard was that guarantee. As the amount of gold is finite, that put a limit on the issue of currency. Following the breakdown of the gold standard, the Federal Reserve abused this confidence. And the United States suffered high rates of inflation.
In the midst of the crisis, a new technology appears
Bitcoin was born in 2008, in the middle of a great crisis of confidence in banks and governments. The blockchain seeks to impose itself as a technology that seeks to restore this trust.
All transactions are recorded in a public record. The amount of bitcoin is limited to 21 million units. Everyone can know how many have already been issued and how many remain to be issued. Everyone can know what is the issuance method. And no one has the power to issue more Bitcoin, the problem: it is not a scalable system.
In his book Sapiens, historian Noah Yuval Harari argues that what distinguishes the human species from other advanced apes is their ability to use fictions to generate flexible collaboration on a large scale. Stories created religions and nations. Also to money.
In 2006, shortly before the crisis, the total money in the world was 60 trillion dollars. Only 10% was in the form of coins and bills. The rest were just numbers on a record.
We are getting used to the fiction that numbers in a database are worth as much as cash. At the end of the day, cryptocurrencies have no less backing than the dollars, euros, or stones that the Micronesian yaps used as currency.
It only remains for a sufficient number of people to start believing in new alternatives to bitcoin as the new chapter in this story.
