Why fiat money fails and how Bitcoin is better
Tags: History, Money, Crypto, Bitcoin, Cryptocurrency

Most attempts to explain Bitcoin might as well be in elvish. This one is not. We get straight to the point and do not use any technical mumbo-jumbo to hide the fact we don’t know something. Keep reading to learn:

The history of money and why our economy is failing;

The person that created Bitcoin and how they viewed their project;

How Bitcoin solves the problems of the traditional money;

When will Bitcoin take over the world;

The best way to start using Bitcoin in 2018.

What made Bitcoin necessary

The current state of the world economy is “on life support”. We’ve been sweeping its issues under the rug for at least five centuries now, and quite soon we will run out of the rug. The global economic crises are becoming common, the countries are going broke. It’s hard to feel sure about tomorrow.

Bitcoin was created to solve all those problems. But to understand what is wrong and how it came to be this way, we need to know how it was initially supposed to work.

What is money and how it works

The economy is the system that allows transferring value between members of the society. To illustrate everything we will be talking about, let’s have a simple example:

You grow beans. Your neighbour grows apples. When your neighbour gets sick and can’t grow apples, you feed them beans and help them get better. You will not get any compensation for that, but your neighbour will survive and will care for you when you get sick.

This is Gift Economy — an altruistic form of economy that first developed around 12 000 BC. But it didn’t last.

You still grow beans. But your neighbour does not grow apples anymore — instead, they wait for you to bring the beans. Since they do not produce value for you, you stop feeding them. This gets them off their butt, and they start growing apples again. Now you exchange 1 basket of beans for 1 basket of apples. However, your other neighbour — who also grows apples — hates beans and doesn’t trade with anyone.

This is a Barter Economy — the first value-based form of economy. It existed in many primitive societies. The Barter Economy is based on the concept of equivalent exchange. It also has an issue — people that produce the same product (or do not need each others’ product) cannot take part in the economy. And then this happens:

You still grow beans. Your neighbours still grow apples. One day, a stranger comes to your village and starts growing cows. Both you and your neighbours want cows too, so you exchange beans and apples for cows. As cows take more time to grow and they are rarer than beans and apples, the prices of every product in the village becomes expressed in cows. Soon, cows become the currency of the island.

This is a Monetary Economy, a.k.a. the one we are using now. It has been around at least since 9 000 BC, and up until the last millennia, it has been going strong. The defining characteristic of the monetary economy is money.

Money is an item that has a universally recognised value and can be exchanged for the products of equal value.

The Metal Age

Useful objects do not make good money. Since they are useful, you always want to make more of them — and that breaks the economy. After a couple of tries, most societies concluded that money should be:

rare;

unproducible by individuals;

permanent;

useless in everyday life.

This led to the Metal Age when the monetary value was assigned to precious (and rare) metals. In most societies, it was copper, silver and gold. In some regions with undeveloped metallurgy, i.e. Japan, even iron had seen use.

TRIVIA: Not every civilisation arrived at this at the same time. For example, a Central American society used cacao beans for money up until the XVIII century.

The Gold Standard

Carrying a dozen coins or even a single gold nugget is not bad. Lugging around even a dozen nuggets requires help. On an even larger scale, a problem becomes apparent — gold is too heavy and unwieldy to use as a primary currency. In the XIV century, the banks and banknotes solved this problem.

A bank is an institution that stores gold and issues banknotes that guarantee this gold. A banknote is a document promising that the bank will issue the owner of the document a certain amount of gold.

Soon, banks had enough gold to make their banknotes trustworthy and stable enough to be considered money. The banks now had actual power. They integrated themselves with governments, further legalising the banknotes as paper money.

Around the late XIX century, paper money replaced precious metals. Gold and other valuable resources were stored in banks and never saw direct market. However, bank obligations were reinforced with the promise of that gold — a so-called Gold Standard. Instead of being useless pieces of paper, they were representations of actual, physical value.

They aren’t anymore.

The Fiat Supremacy

In the early XX century, the gold standard became very hard to support. The countries that instituted the standard were at war with each other, and the value of gold changed every day.

By 1931, Britain, Germany and Austria cancelled the gold standard. The United States followed suit in 1934. In order to keep the market from collapsing, President Roosevelt had prematurely banned the US citizens from owning any savings in gold. This order will not be repealed until 1974.

Read the full text of the Executive Order 6102 at The American Presidency Project

However, some measure of logic and sustainability remained. The currencies could still be exchanged for gold, but only at the rate defined by the government. For example, the Bretton Woods system fixed the cost of gold at 35 dollars per ounce.

Everything changed in 1971. In response to a financial threat from France, Richard Nixon abolished the Bretton Woods system. From that point, the dollar’s value was measured in relation to other currencies.

Other countries followed soon, and since then money only had relative value. Or, some might say, no value at all.

CHAPTER REFERENCE LIST 1. “The Bitcoin Standard: The Decentralized Alternative to Central Banking” by S. Ammous. Mr. Ammous clearly did his research and offers good insight towards the state of modern economy. 2. “Debt — Updated and Expanded: The First 5000 Years” by D. Graeber. We skipped over this subject for the sake of conciseness. If you really want to know the history of banking, this book is the place to start 3. “Paper Money — Extra History” by Extra Credits. Bite-sized videos on how the money we know came to be. Very good content and production value, although don’t expect them to be as detailed as the books above.

Why fiat money is bad

Fiat currency is a currency that holds no intrinsic value. It is valued only in relation to other currencies. All currencies that we are using today are fiat.

This means that the banks can print as much money as they can without necessarily guaranteeing its value. If done poorly, the money starts losing value quickly. It is called hyperinflation. It happened in Russia in 1992 and is currently happening in Zimbabwe and Venezuela. And yet, this is a best-case scenario.

In the worst case, a government that prints money is strong enough to dictate the worth of their currency to other countries. In other words, they get to print more money at the value they insist it has.

The USA has been doing this ever since 1976. And then they loaned those dollars as debt to other countries or exchanged them for natural resources. The abundance of the dollar in the world economy led to other currencies being valued only in relation to the dollar. The same dollar that is not guaranteed by any real-world resources. Right now, the actual cost of the dollar is 3 times higher than it should be.

And that is the problem with fiat money — the economy cannot regulate itself if it is isolated from the physical (or at least real-world) values. It becomes detached from reality. And when the level of detachment reaches a critical point, the economy crashes.