Over millennia, humans' social desire led us to help, trust and trade with non-akin individuals to create mutually beneficial value.
In the early days of agriculture, debt and credit helped us trade in barter societies where people started specializing their skillset, stimulating trade with neighbours' to feed each other. As local exchanges started to intensify, keeping track of debt and ledger history for both individuals and groups became cumbersome. On top of it, the problem of matching wants in bartering made it simply hard to scale trade beyond a certain size and frequency of exchange.
Looking for a fix, humans quickly and iteratively sought alternative systems in the form of various natural commodities to serve as a way to exchange, store and ultimately measure value in commerce. Seeking the best option, humans tried it all: stones, salt, spices, sea shells, glass or gold to use as neutral forms of money. Most of these commodities all had something in common: they had natural properties that made them relatively neutral in trade, portable across space, durable over time, divisible amongst scales, and generally fungible or replaceable by other similar items.
As early as 5,000 B.C., we have been collectively calling it money, an ever-evolving technology sought, and freely adopted by people.
The common understanding and appreciation of money has massively evolved over the past centuries. Following multiple trial-and-errors, we came to realize the necessary properties that make money a stable, usable and trustworthy means of storing, sending and measuring the amount of effort put into labour. Time is dedicated to labour in an effort to achieve something, usually a product or service the producer will then sell in exchange for money. For buyers not having the skillset to produce, it is economically rational to spend money to acquire it from someone else who does.
Acquiring a specialized skillset takes time, hard work and perseverance such as a wood crafter, a book writer or a computer engineer. Undeniably, money can be interpreted as frozen time, which lets humans store their hardly earned labour for a future date or exchange it freely at any moment against other people’s specialized products and services that they wouldn’t be able to get otherwise. Using money, humans had the ability to specialize in specific fields to get productive at what they do, increasing their ability to produce more at a better quality. With their earned income from this specialized labour, humans were ultimately able to buy and rent other products and services from other specialized humans. Without money, humans wouldn’t have been able to specialize, having had to rely on bartering, which doesn't scale due to the lack of matching wants.
Leveraging money has propelled human societies in subsequent eras of rising prosperity, enhanced by substantial improvements in productivity, doing more with less. Rapidly growing from a population of 60 million in Roman times, to 1.7 billions people at the beginning of the 20th century, we are now reaching 7.7 billions individuals only one hundred years later, exemplifying the value money created for us.
From the age of hunter-gatherers, towards agriculture, and the industrial revolutions, we've recently entered the now well-known information age. Critical pieces of human activities are moving to the digital realm, bringing massive efficiencies to freely distribute information across the world at an almost zero-marginal cost, and that, quasi-instantly. The Internet was the singular trigger for that shift, which broke physical barriers to communicate amongst multiple parties across global networks. Before that, its analog predecessor, the Telegraph, had led the way with a single communication channel, which was the first time humans could communicate across borders.
The evolution of computers into a networked environment gave birth to the rising digital era. Since then, software has been rapidly ‘eating the world’, spreading via the Internet, powering our social and work lives as much as our homes, cars and hospitals. As an ever-evolving species looking for better ways to thrive collectively, we're now working daily with previously distant neighbours in different time zones. We're buying products from across the planet when we can't find them locally or find them cheaper elsewhere. Beyond exchanging information, goods and services, we now exchange trillions of dollars of value on the Internet on a daily basis with billions of other human peers and companies.
The value of goods and services we buy and sell today is currently denominated in 180 national currencies. These local “fiat” currencies are defined by legal tender laws whose value is backed by the government that issued it. Fiat money is present in 195 countries that regulate, protect, and control the amount of available monetary units that are available at any given time through discreet monetary policies. Powered by religious beliefs, empires and nations have been the main vector of global economic expansion in the last centuries, facilitating the development of regional transportation, culture, infrastructure, and trade. As a coordination mechanism for humans, countries have been sustaining their expansionary desires by controlling their monetary policies to stabilize their economies and manage the value of their money against other foreign currencies.
Previously, currencies were fully redeemable in gold, as a proof of reliability and truth worthiness for trade settlements. As gold is no one's liability, currencies pegged to it were actually asset-backed and transactions had undeniable finality between countries, which incentivized central banks to accumulate larger amounts of gold for stability. Paper certificates were then issued in an effort to serve as a way to make gold more usable, portable and divisible for daily commerce. Trusted banks gradually started occupying this function of commerce, which enabled people to convert their paper money back into dollar at any time. Carrying gold was indeed not very convenient for mainstream consumers. More than that, in 1933 Roosevelt’s US government issued Executive Order 6102, making gold private ownership illegal, including a penalty of 10 years in prison and a $250,000 fine for owning more than $100 worth of gold. Banks were also prohibited from issuing any gold payment to citizens.
Paper money then became the standard to store and exchange value for US, and citizens of other countries. Over time, countries have been steadily debasing the scarce yellow rock collateral and paper money created additional claims on the existing vaulted gold money reserves held by newly trusted institutions, central banks. At the dawn of WWI, countries started to create even more claims on gold, further diminishing the individual money value of each citizens holding it, to artificially finance their short-term GDP expansion, debt and even wars. The Weimar Republic’s hyperinflation episode is the most popular illustration of the first half of the 20th Century. This nefarious behaviour has undeniably led countries to neglect the natural scarcity of gold, which was the sole property responsible for its collective election as a multi-century global reserve asset.
Most recently, in 1944, gold was recognized as the global asset reserve under Bretton Woods Agreement. It was a US program established after the American intervention in Europe to dismantle Nazi's Germany in WWII, to ensure currency exchange rate stability across nations, prevent competitive devaluations, and promote sustainable economic growth. Positioning gold as the asset backing the US dollar on a fixed peg, the Bretton Woods system made sure no countries would abuse their printing press by fixing the value of their national currencies to the US dollar. This was a US-led and globally coordinated effort to prevent unreasonable economic stimulus, which had created inflationary recessions (massive increases in consumer prices).
Countries such as Germany in the 1920s had abused the printing press having realized their incapacity to pay their war reparations imposed by the Treaty of Versailles, crushing Germans’ purchasing power, which led to the rise of populism and political instability. Later on in 1971, as part of the Nixon Shock, a series of economic policies, the US government stopped the US dollar’s convertibility to gold due to the rising addiction of economies to leverage their national monetary policies in the stimulation of short-term economic growth. The United States maintained their hegemony as all currencies remained pegged to the US dollar while a novel leading position was established on a rising commodity, oil, which was needed by most countries in the fast-paced industrialization of the 1970s and 1980s. Today, petroleum is mostly priced in US dollars, which gives it an artificially stable position as a global reserve currency.
Since it’s debasement from gold, the US dollar lost over 90%, while other free-floating fiat currencies followed similar downward paths. Countries arbitrarily use the printing press once again the finance national debt that reached maturity and need to be repaid to creditors as payment defaults obviously affect their future ability to borrow. As sovereign debt rises to new highs, the US $22 trillion dollar debt along with a $1 trillion deficit in 2018 appears to be inflating unsustainably. The Federal Reserve may very well further expand their money supply in the US by printing more US dollars to purchase bonds from the US Treasury that need to pay back current creditors, having reached abnormally high levels of debt-to-GDP, amounting to over 105% in 2018.
Fiat currencies getting large inflows of new units added to the circulating supply by central banks lead to wealth extraction from currency holders who do not invest their money in yield-generating assets. Money is stable if its new flow of units created is relatively smaller than its current existing stock. The larger the stock-to-flow ratio, the more stable the value of the currency is. This is the very reason why gold was the most successful money after humans have tried spices, salt, seashells and other forms of money before. Gold is naturally scarce because it is mechanically hard to dig it from the ground. Each year, around 2,400 tonnes are mined from the ground. Gold’s stock-to-flow ratio is large, roughly equal to 71, which means it currently takes 71 years of digging non-stop to get the current existing stock of 170,000 tonnes.
Fiat currencies have a low stock-to-flow ratio, which diminishes frequently as central banks print more money to control their national monetary policies. Citizens in politically unstable countries are seeing most of their wealth vanish due to depreciating currencies. Inflation is an upward wealth drought from fiat money holders to yield-generating asset holders. Poor citizens get poorer as money they hold lose purchasing power due to inflation while capital owners get richer benefiting from monetary inflation pumping their real-term yield-generating positions (positive return earned over the inflation).
Venezuela is a current illustration of what happens when a fiat currency, in this case the Bolivar, is exposed to political instability of a government. Maduro-led Venezuela has been experiencing an astonishing 80,000% inflation in 2018, which brought the life savings of millions of Venezuelans to be worthless, causing tragic financial damage and irrevocable losses for many hard working families. Recently, the country has gone into darkness with a long-standing power outage. Multiple other countries such as Germany, Hungary, France, or Zimbabwe faced dramatic hyperinflation events in the past.
Across time, the realization that centrally-controlled government currencies do not work is evident. As more countries see higher rates of national inflation, leading to an undeniable loss of citizens’ purchasing power, people will start looking once again at other forms of money. Our current currencies, whether it is the Euro, the US Dollar, or the Argentinian Pesos are all designed around the same obsolete principle: governments can be trusted to control the issuance of money conservatively. The Internet gave us the ability to talk to everyone without anyone’s permission for free and instantly. Utilizing a more stable money for savings or to send payments abroad to families and friend should be done without anyone’s permission too.
Heard of Bitcoin?