---
title: 1.2 The History of Money
description: The History of Money and Reserve Currencies
---

# 1.2 Bitcoin, The History of Money, and Reserve Currencies

## Introduction

This lecture is perhaps one of the most important in setting the stage for the ‘What’ and ‘Why’ of Web3. As a prequel, it is fair to say that in Crypto we have a multi-faceted industry that often leads to incongruence between the different parties involved. The finance people cannot understand the tech stack, the devs cannot do crypto-economics, and the marketers struggle to understand both! 

The goal of this lecture is to give everyone here a concise and substantive overview of the financial and monetary context surrounding the emergence of the Internet of Value (also called Web3 or Crypto). And to do that we have to go on a bit of a journey through economic history. 

## Money Over Time As A Social Construct. The Boring Basics

Monetary theory 101 - the very boring basics. This is conceptual and something to just keep in mind from a very high level: 

Humans have consistently abstracted value away, as a convenience mechanism over time - they have optimized. What does this mean? It means when we used to barter, we evolved to use sea shells, from which we evolved to use record keeping of credit, and the state issuance of a minted coin. Then over time, we have further abstracted from that minted coin into paper money, and now we stand at a period where that level of abstraction is reaching even more incredible levels - namely the digital domain. 

Crucial to understand, in this context and as you can see from [the title of this extremely boring article](https://www.academia.edu/723898/1973_Dinar_versus_the_ducat) - The Dinar and the Ducat - is that the origin of value - over time - has been first and foremost based upon the buy-in and social consciousness of the human collective. Money is a social relationship and it is largely based upon the belief in the value held by a specific asset by a certain group of people. This is crucial to remember as we enter the world of tokens and crypto-currencies. 

## The Geopolitics of Money

Second, and building off of this first point: The institution or entity that has maintained the social agreement on the value of value (on what is money), has traditionally been the state or the king! And as states have evolved - and more specifically - the nation-state we have seen certain patterns emerge in terms of the strength and sustainability of monetary schemes. Here is a macro of what those look like: 


![](@site/static/img/bootcamp/mod-em-1.2.1.png)


And there have been some fascinating lessons from this evolution in state-governed money in the past 600 years (which are directly relevant to what we will be diving into, on the topic of crypto and Web3): 



* **(NEO) Mercantilism:** At first, everyone fought to strengthen their own currency standard against and at the cost of each other. This was known as mercantilism and subsequently neo-mercantilism. It was zero-sum, extractive, and competitive between states (mainly European ones).  
* **Capitalism:** Over time, the winners realized that it was to their benefit and advantage to work together. This is the basis of the early stages of capitalism as described by Adam Smith in the Wealth of Nations. This transition is one of many factors often regarded as the basis of the ‘Great Enrichment’ or ‘the First Industrial Revolution’. Money, ideas, and people were able to share and collaborate from which innovation was born. 
* **The Gold Standard:** By the 19th century, this morphed into an alliance among these countries no longer fighting each other, to adopt a ‘Gold Standard’. But the theory here far exceeded realistic expectations in reality. In reality, it was constantly debated whether Gold or Silver were reliable reserves, and if they could truly be trusted to back a currency regime. Nevertheless, the collective consciousness came to understand healthy monetary policy as requiring ‘gold’ backing. What needs to be remembered, is this was always controlled and modulated at the convenience of the governing state. There was never a ‘gold standard system’ floating outside of national monetary interests. 
* **The Rise of the USA Federal Reserve and the Petro-Dollar:** At the end of WWII, we see a transition into the unprecedented situation of today (or recent times), which is characterized by the absolute dominance of the US Dollar. Absolute dominance here refers to the settlement currency used for the bulk of trade around the world. To keep things simple, thanks to the positioning of the USA at the end of WW II, and the destruction of other modern monetary regimes, the US Dollar was the natural currency enforced in the liberal world order (often spoken of by Peter Zeihan). This was then strengthened with the rapid digitization of finance. 
* **The Digitization of Money:** Getting up to the present, we arrive at a relatively disturbing state of affairs: Widespread financial illiteracy, in a world dominated by the dollar, and printing excess amounts of money in the form of loans and debt obligations. Let’s pause here for a second and dig in on this, because it absolutely informs the environment which gave way to Bitcoin and crypto-currencies. 

## Commercial Banking and Money Supply

As you will see from the recommended reading there is a book titled_‘Where does Money come From?’_by Professor Richard Werner. And our interests in this book, beyond the structure of the Bank of England or the Federal Reserve, and the relationship between the Federal Reserve and Commercial banking, is the nature of money and credit in society. This is summarized clearly in the following statement by the Bank of England: 

_“Where does money come from?  In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood. **The principal way in which they are created is through commercial banks making loans**: whenever a bank makes a loan, it creates a deposit in the borrower’s bank account, thereby **creating new money.** This description of how money is created differs from the story found in some economics textbooks.”([Bank of England](https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf))_

This is to say, that money supply, as controlled by Commercial Banks, is loosely enabled by a select few, within certain limited government currency schemes. In other words, the government has given the mandate of money creation to certain private banking institutions which it, in principle regulates. 

And since the advent of the internet - these institutions – have been _printing_.


![](@site/static/img/bootcamp/mod-em-1.2.2.png)


So the hard truth is:



* 97% of current money supply is digitally created (not in paper form). 
* We have printed an excessive amount in the last 20 years that is not correlated to reserves.
* And the game is gated under this legacy system of state denominated currency regulated by private banking institutions. 
* Here is the game zoomed out over time. 


![](@site/static/img/bootcamp/mod-em-1.2.3.png)


And there are a couple of things to say about this system fundamentally irrespective of how well it might have worked for you (or not): 



* Money supply is controlled by first and foremost the government, and secondarily by private institutions. 
* The individual is 100% dependent on both, in order to participate in the financial system.  
* The system can eliminate or remove certain individuals or entities, based on the geopolitical control over the currency regime in question (think Iran being banned from SWIFT). 
* Since the digitization of money, supply has drastically increased in the form of loans from commercial banks. This ‘up-only’ mentality has fueled speculation, bubbles, and hyper financialization. 

## Introducing Bitcoin

_“The real exciting thing about this technology is not a blockchain. A blockchain is a database artifact created out of this protocol. No, the real excitement comes from the ability to achieve distributed consensus among parties that don’t trust each other, across great distances, without any central party, authority, or intermediary.”- (Andreas Antonopolous, the Internet of Money, Volume III - 8)_

All of what has been mentioned has been a build-up and essential context towards understanding the value proposition of Bitcoin. It is only through this context, that one can come to grasp the underlying value proposition of Bitcoin, which is best understood through the following question: 

“_Is government regulation of banking and money more harmful or helpful? This is the key hypothesis.”_

This is the clear picture of what Bitcoin is: 

Bitcoin is a digital monetary system, in which the value of the system is maintained and ‘regulated’ by random operators plugged into the internet. These operators are known as miners, who compete in calculating complex calculations as a means of confirming the ‘state’ or ‘ledger’ of the system of money. 

The value here is not in the technicalities of how the Bitcoin network works. That is what is indicated in the Antonopolous quote:

**_“The real excitement comes from the ability to achieve distributed consensus among parties that don’t trust each other, across great distances, without any central party, authority, or intermediary.”_**

So for the first time in history, we have a monetary system governed in a ‘decentralized’ manner such that there is no national authority or commercial body regulating its supply and demand. But rather, the network has been programmed to operate a certain way such that there is no way a single authority could corrupt the network. 

In practice, this leads to some entirely new possibilities and opportunities in the deinstitutionalization of money: 



* (**Sovereignty**) Individuals can self-custody value, outside of the centralized institutions or regulated containers. 
* (**Digital Reserve**) Countries now have alternatives to the reserve currency of the world (petro-dollar) - the thesis by Xapo Wences is that BTC is positioned to become the world’s reserve currency in the coming century. 
* (**Money at the Speed and Access of the Internet**) Money can now move across borders and jurisdictions, on the internet, without oversight or interference from authorities. 

_“**A System of Money on a Network: **A system of money that operates on a network. It is first and foremost a medium of exchange, a store of value, and one day (potentially) a unit of account. But it will never become a system of control: it refuses to become a system of control. In fact, its design principles are neutrality, openness, borderless access, censorship resistance. (Antonopoulos, 48)”_

For these reasons, Bitcoin has been referred to as digital gold. Or arguably, a digital manifestation of the theory behind gold and rare metals. There do remain some large questions vis a vis the long-term future of Bitcoin: 



* Right now there are around 19.1mm BTCs in existence. There will be a total supply of 21mm in around the year of 2136. What happens then? Fees from the network is usually the most referred to answer. 

**[IF TIME AND IN PERSON - BALAJI TALK to LEX ON HOW BITCOIN REINVENTS MONEY.]**

## Bitcoin and the Advent of Cryptocurrencies: Currencies vs. Tokens

With Bitcoin we have the advent of sovereign digital currencies - that is to say, forms of money tokenized on the internet, in such a way that they are used to pay for goods and services. This is the proper term for crypto-currencies - currencies that are cryptographically secured on a distributed ledger. Other forms of crypto-currencies include Litecoin, Blackcoin, and Ripple (XRP). 

Separate from a crypto-currency is what is known as a token - or a digital token. These are _not_ crypto-currencies, but rather created on a distributed ledger for a different purpose: _for a specific utility, for governance, yield,_ or something else specific to a protocol or dApp built on a smart contract platform. 

The conceptual distinction is to ask about the underlying nature of the system in question: 

_Is there a utility for the token in question, or is the utility of the token to be used as an exchange or store of value? That is to say, is it a payment token, or does it serve a specific function in light of the nature it is created from and imbues value to?_

## The Importance of Crypto-Economics in A New World of Value

And herein lies the key principle which we will visit and revisit over and over again:

_In crypto- whether it be a crypto-currency or a crypto-token, the underlying paradigm shift is that of shifting the origin of value, from an entity in a system, to the system itself. And the token, as representative of a fraction of the system, enables participation among anyone who owns or manages the token._

That is to say, with Bitcoin, sovereign money is the result of a distributed network of Bitcoin nodes, maintaining and collaborating to manage the state of the Bitcoin network. This is in contrast to the Federal Reserve system whereby a single entity - the Federal Reserve chairman and board, dictates certain policies to the rest of the system. 

With crypto-tokens, the same principle applies: When we are building a protocol or dApp on a smart contract platform, we are designing solutions which are value imbued with a fungible token of sorts (if these protocols and dApps are open source and public networks). 

This principle is an allusion to the brand new world of crypto-economics, which refers to the design, implementation, and mechanics of a value-imbued system that offers a specific service to the world. 

For now, we can conclude from this dichotomy, that crypto-is first and foremost a financial and political technology, that happens to originate through code - and on the internet. And the story that crypto is inserting into, tells us that it has originated at a very interesting time in economic history.