All our lives, all we have used as a medium of exchange has been money, actually, currencies forced on us by governments- the so-called FIAT CURRENCIES. The concept of money becoming a product that has to compete in the free market for the populace to determine which is best sounds very strange. Let me state it here categorically, we have entered that age. The age of the gradual demise of the government-controlled and enforced fiat currency and we are gradually moving into an age where money becomes a product that competes in the market place for adoption.
A brief history of money
The control of money has not historically always been the preserve of governments. Up until the advent of modern times and the institutionalization of central banks. Money actually was a product of the free market. Historically, after the age of trade by batter and the evolution of money as a medium of exchange, gold and silver have been traditionally used as money. Other materials that have been used as money include; salt, seashells, silk etc (all being items with some level of scarcity and intrinsic value). Gold and silver were minted into coins as early as 1100BC by the Chinese. By 600BC, king Alyattes of Lydia (now western Turkey) had issued various denominations of gold and silver coins as money (note, he only help mint it. He did not enforce a value on the coins. The market did). All through this while, certain governments and monarchies have tried to issue out paper money as far back as 1224AD (when the first fiat currency was issued in China). Every time this was done, fiscal responsibility and restraint was lost. Such governments printed the paper money (fiat currency) to oblivion to fund wars in most of the cases. The resultant effect was that such paper money backed by nothing mostly reverted back to its true value-ZERO! (our current economic model is destined for the same end. ALL FIAT CURRENCIES THROUGHOUT A LL OF HISTORY ENDS UP BECOMING WORTHLESS).
In the middle ages and into the Renaissance, 1500-1600. European banks adopted the use of paper money that was backed up by gold. (this is very different from fiat currency issued by governments backed by nothing). Each note could be redeemed to the physical gold or silver value it was worth at any time the owner pleased. This was done to ease trade and to facilitate commerce. The money was not issued by any central government but by private banks and financial institution of the day. Such banks had to exhibit financial discipline. They actually were competing with other banks in the free market and the paper money they issued must be viewed as sound or they would be competed out of business. For example, whenever their customers presented their paper bills for redemption into gold, they had to make sure their banks had the gold to give the customers or their clients would lose faith in their operation and move over to their competitors.
By the dawn of the 20th century however the idea of sound money competing in the market place began to be lost as a wave of central banking got a hold of Europe and then the United States. The grand plan to phase out a gold backed paper money was laid and by 1971, the US dollar and by default the world’s money was pulled off the gold standard.
The effect of central bank issued currency
The age of the central bank issued fiat currency has brought the world’s economy into the age of debt.
- $22 trillion dollar United States’ national debt
- $120 trillion debt of unfunded entitlement program (United States)
- $1.4 trillion student loan debt (United States)
- $4.8 trillion Federal reserve bank debt (United States)
This debt profile is not that of a developing economy like that of my home country nigeria for example. It is that of the most powerful and prosperous nation in the world. Worldwide the global debt figure stands at $220 trillion. and the very big one, the derivative markets (a market that derives its value from underlying assets whose ownership has been given to multiple owners. In some cases as in the case of precious metals, it has a rehypothecation figure of 1:500. That is 500 claims to each ounce of gold traded in this market, think deeply about that!!!). This market has a value of….. wait for it…… $1,200 trillion. it is essentially a time bomb waiting to explode. It is obvious that this current model of centrally planned and controlled money can’t hold out till forever. To keep the show going, central banks across the world have resulted in some very desperate measures viz
- Zero Interest Rate Policy (ZIRP)
- Negative Interest Rate Policy (NIRP). This one is actually ridiculous! You are penalized for keeping your money in the bank! The money (actually currency) you deposit in the bank is not yours anymore, anyway……. I digress (a story for another time)
- Quantitative Easing (Q.E). simply put , currency printing! Since its inception in 1913 till 2009. The Federal reserve bank had a debt of just $800 billion on its balance sheet. By 2014 after Q.Es 1,2 and 3, its debt had ballooned to $4.8trillion. that means it printed $4 trillion out of thin air in a space of 5 years. Ridiculous!
The introduction of competing, non-centrally planned money
In 2009, the world’s economy came very close to a collapse. The case for an independent form of money that is censorship resistant, unconfiscatable (gold, which is an example of sound money was outlawed in the US during the great depression. By 1933, the United States’ government had the right to walk into it citizens’ hmes and confisticate any gold they held) and permission less. It was at the height of the 2009 economic woes that Bitcoin was born with the release of it white paper in October 2009 and the mining of its genesis block in January of 2010. A competing form of money that was sound, hard money was released and it began to gain adoption. It started simply as a collectible for internet geeks then it bagan trading for 3 Bitcoins for 1 cent in late 2010. A a point, a gentleman bought 2 pizzas for 20,000 Bitcoins
. Because of its darling qualities namely:
- Its fixed supply (only 21 million Bitcoins will ever exist)
- Its permission less trait. You don’t need any one or institution to give you the permission to use it
- Censorship resistant: no one can stop your transactions on the Bitcoin network
- Not controlled by any person, group of persons, government, institution etc
It has become an established money system and it has risen in value astronomically. Today, it trades at $3800 for 1 Bitcoin, several other cryptocurrencies also exists that have gained traction. A whole load of other cryptocurrencies have also been released that has gone to zero as they couldn’t compete for adoption as the market couldn’t trust them as sound money.
Money has become a product
In the past 2 weeks i.e last 2 weeks of February 2019. Centralized institution have joined the fray. JP Morgan bank and Facebook released their own native cryptocurrencies. While these are very different from coins like Bitcoin which is based on the decentralized block chain technology (centralized cryptocurrencies and decentralized cryptocurrencies cant be compared at all. They are two diametrically opposed things). It gives credence to the fact that as a specie we are beginingto leave behind the age of state controlled monetary systems and into the age in which money becomes a product that has to compete in the free market for adoption. Let me be clear I don’t mean our current monetary system is gong to zero tomorrow. No, not at all. What I am saying is , going forward, the function of State issued money will begin to decrease as other forms of sound money begin to evolve and compete with fiat currencies for adoption in the market place. Sure governments will kick against this as is seen in Venezuela right now but ultimately sound money will prevail as citizens flee baseless and worthess fiat currencies.
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