Trust Me I’m A Bank
This article covers:
- How money came about.
- What creates good money.
- Why our trust in banks is misguided.
- Why we can trust Bitcoin.
Why Money
The exchange of goods is something all societies need in order to advance.
In primitive ages before the adaptation of money, societies relied on a barter system to exchange goods. farmer 1 would have something that farmer 2 wants, and so farmer 2 would exchange their goods for farmer 1’s goods.
This system works in theory however in practice it is easy to see how cumbersome a system like this would be.
If farmer 1 has a cow that produces milk, he can have as much milk as that cow can provide him. However, if that farmer ever wanted eggs he now needs a chicken to produce those eggs. Now his cow is not very useful as it cannot produce eggs for him, he is in need of a chicken.
If farmer 2 has a chicken but wants milk he would be able to trade with farmer 1, as they both have something the other wants and so an exchange of goods can take place.
In primitive societies before the invention of money that is how the system operated.
It is easy to see the downfalls of a system like this. Say farmer 1 doesn’t want eggs anymore and now wants bread. The value he placed on those eggs now reduces substantially and thus has lost a lot of value to the farmer, and the value of bread has now risen substantially to the farmer.
Now eggs have less value and thus reduced their perceived value, and bread has increased its perceived value.
In a society purely operating on a barter system it is possible to survive but impossible to store and create wealth, and therefore also impossible to prosper. There is not one thing that everyone needs at all times so the individuals within that society have no option to store any wealth.
If an individual was to perform a show and sell tickets. They could accept all kinds of produce from farmers to pay for those tickets. They may end up with 10 cows, 15 chickens, and 20 loaves of bread.
In the barter economies, they are wealthy, yet in the real world, they now have far more problems.
They may not need all this produce so now they need to find someone who does. Otherwise, the cows and chickens need to be fed and the bread will go bad.
It would be incredibly difficult to find people who want all these goods.
For a society to grow, there needs to be a medium of exchange that is accepted by all individuals within that society. A society that has this system can thrive as farmer 1 can trade his milk for money with farmer 2, and trade his money for bread with farmer 3.
As long as the chosen money is accepted by the majority of individuals as having value this system will work, and so money is created.
Money
As societies began changing to money-based systems rather than exchange-based systems, the next step is to figure out what would work best for money.
In theory, anything a society sees as having value by the majority of individuals could be used as money. Anything from sea shells to giant rocks. The distinction of money is how well it will work, which can be decided upon a number of different factors. Just because something is seen as having value and is chosen to be used as money, does not mean it will perform the functions that money needs to perform well.
Taking an example from the money we use today we can see how it works. Governments give money its perceived value — we can trust money today because we know it has been issued by the government, thus the overwhelming majority of society must accept it.
Notes we use today can be stored for extended periods of time. This is important because individuals may hold onto money for years and as such money must not perish over time.
Notes are divisible so it is easy to exchange without needing the exact amount for the transaction. It is just as easy to spend $1000 as it is to spend $10.
Characteristics of money today are adequate, and the money that we use today does work well.
You can argue that over time this may not be the case.
Another important characteristic of money is that $1 today should equal $1 in 10, 20, or even 50 years. If the money is not built like this individuals will lose wealth over time, and as a result, their output to create wealth must increase.
Sea Shells
West Africa, China, and other parts of the world began using sea shells as early forms of money.
It can be hard to believe but sea shells actually do have most of the same characteristics of money we used today.
They were accepted by the majority of individuals, they did not break down over time, and they were somewhat divisible.
The characteristics of sea shells meant that they could be used successfully as money for some time. The problem emerged due to their scarcity. Sea shells definitely could become overly inflated very easily, all an individual needed to do was to find a lot of sea shells that were being used as money, and all of a sudden they were rich.
Although the individual has become rich, they have also inflated the supply of money too much for the money to stay viable, and thus the value of a single sea shell falls the more sea shells are found and added to the supply.
If the amount of sea shells that are circulating in the economy stays the same, or at least relatively the same, then the wealth of that economy will also stay the same. But suppose a single individual finds an abundance of sea shells, or even worse can produce sea shells at will. In that case, the overall supply of sea shells becomes overly inflated and every other individual within that society becomes poorer, while one person becomes rich.
This is synonymous with our money today. Those that control our money can easily inflate the supply of money and become richer, at the expense of all other individuals.
Another way to look at this aspect of money is the Stock to Flow ratio of money.
Stock to Flow
Stock to Flow is a very important factor in determining how successful the overall outcome of something being used as money will be.
Any successful money has to have a viable stock-to-flow ratio and the better this ratio is, the greater the success of a money will be.
Stock = the amount of money (or what is being used as money) already in circulation
Flow = the amount of money that will come into circulation in the future.
Gold and silver were the big winners over time as they both had the best stock-to-flow ratios.
Both had an adequate supply circulating within the economy at the time and both were hard to create more of.
Gold had a better stock-to-flow ratio, as it was harder to mine gold than it was to mine silver and so was valued more highly than silver. Gold became used for larger transactions and silver became used for smaller transactions.
Gold flourished as a natural use for money, although as gold became more widely used the downsides to using gold as money became more evident. These downsides still exist today and are mainly the reason why gold is not still used as money.
Storing gold became dangerous the more wealthy an individual became. Thus the need to be able to store gold safely arose. Originally it was the goldsmith who fulfilled this need in their vaults, these were the first iterations of banks and the beginning of the need for trust in the financial systems.
There is a need to be able to store gold safely both from criminals who want to take your gold as well as governments.
Governments have in the past forcefully taken gold from their citizens, it is possible to store gold safely from crooks and thieves it is much harder to store your gold safely from the government.
Both are needed to be able to store your wealth. Whether you lose your wealth to criminal theft or government theft, you have in both cases been robbed.
Banks and Trust
The popularity of using goldsmiths to store gold grew increasingly, and as more people stored their wealth in the goldsmith the goldsmiths grew and eventually became what is today known as a bank.
When an individual deposited their gold into a bank, the bank would in return offer them a receipt to say they had an amount of gold held within that bank.
Gold inside these banks grew, and so more of these receipts were held by individuals.
Gold was cumbersome and often times the effort to pay someone with gold was annoying and inefficient.
The receipts customers held verified the amount of gold that they held in the bank, and so individuals soon started using these receipts in place of their gold as they were seen as being as good as gold.
Now the banks had a new problem, they had a lot of gold just sitting there not doing anything. Customers didn’t need this gold as they were using receipts rather than physical gold.
So they came up with a solution. They could lend out some of the gold to people and as long as that person agreed to pay back the gold with interest the banks could make profits off of its gold reserves.
This in turn created the need for even more trust in the banking system. People believed their gold was held safely at banks and so trusted the banks had their gold sitting there if they ever needed to withdraw it. The banks did not.
Trust, in the early stages, could be argued was safe, in the sense that a complete loss of trust in the banks would not lead to financial ruin for an economy as it would today. This trust was misguided in the past as it still is today. Banks offer its customer far less in return for their trust than what they benefit from it.
In the beginning stages, the bank lending was small and so could be manageable. Banks could offer existing customers gold as debt to new customers as long as it stayed at a small fraction of their overall gold reserves. A system like this would be sustainable over time, especially if the customer whose money was being lent was informed, knew the risks, and was okay with their money being lent out for interest.
Unfortunately the banking system today does not work in this fashion and is far more dangerous.
Greed from the banks will break down the trust that they rely on.
The Problem with Greed
Of course, proponents of this banking system argue it is good for your money to be lent out. Lent out money creates economic growth, and money sitting in the bank isn’t doing anything for the economy.
They think savings are bad, and debt is good.
The problem that arises is that it is not the individuals with the money doing the lending, it is the banks using other people’s money.
Greed means banks operate at fractional reserves, and worse yet they’re allowed to. Your money goes into a bank and immediately goes someplace else.
Is that fair? Too bad if you think it is because you don’t have a choice anyway.
The fractional reserve banking system is so bad today that as of March 2020, the Federal Reserve reduced the requirements of reserves banks needed to hold to 0%.
The money you think you have in the bank simply is not there.
These ludicrous requirements signify the epitome of what greed has grown to. How safe is a system where all the money is lent out?
The entire system is relying on the debt being paid back. Debt on top of debt on top of debt. It just takes one bad apple to spoil the bunch.
The system quickly breaks down if the people begin to see the system for what it is and realise the banks do not have their stored money. Their skepticism of the banks is valid when they go to redeem their money, and the banks do not have enough money reserves to honour all the withdrawals.
This is what creates a bank run.
Bank Runs
New money is not created when currency bills are printed.
It is created when new debt is issued by banks or governments.
Unlike Gold or Bitcoin, fiat money can be created at any time and could be argued without any limit. Governments and banks will find any excuse they can to create more money or in other words issue more debt.
The only limit to money creation is inflation. Inflation creates the threat of monetary collapse through the potential to cause hyperinflation. This is the only restraint on governments and banks to stop creating money infinitely.
Although governments argue that 2% inflation is good, nobody including them wants hyperinflation.
Hyperinflation is when inflation gets so bad that it cannot be tamed by raising interest rates.
Hyperinflation in Countries as of 2023
- Venezuela: 250%
- Zimbabwe: 182%
- Argentina: 80%
- Sudan: 65%
- Turkey: 45%
If the target inflation rate is 2% you can imagine how catastrophic inflation rates above even 10% can be. Let alone inflation rates of 250% as seen in Venezuela.
Inflation rates that high would mean that any savings you had, anything you had spent your life building would be gone over the course of a year. Melted away because of a bad system.
These countries experience hyperinflation and see the system for what it is, economies built on mountains of debt.
Hyperinflation can happen to every country in the world.
Old debt is paid off with new debt, which rolls over until the new debt must be paid off with even newer debt. This system keeps going until it doesn’t.
The link above is the real-time US national debt.
That number keeps going up, and it’s not coming down.
We Go Up and Back Down
Debt creation gets out of control as it always does in any boom-and-bust business cycle.
As the debt increases amongst society people are led to believe in a false sense of prosperity. The whole economy is “booming” all due to the creation of debt, this boom lasts as long as the debt can be repaid.
In the boom phase of the business cycle banks are lending and issuing debt which creates a fake sense of economic growth, however, because this debt is issued from newly created money and not from money already created (savings) the economic growth is very unstable as it relies entirely on the borrowers being able to repay their loans.
As banks are relying heavily on everyone being able to repay their loans, everyone else is relying on the banks to be able to repay their own loans. This is a very shaky system because as soon as the weakest link in the chain breaks i.e. a failed business venture that went bankrupt that as a result cannot now repay its debt. Now the bank that issued that debt is less likely to be able to repay its own debt.
As more debt is issued more money is created. As more money is created prices of goods begin to rise. As prices rise so does inflation.
The rise in prices brings a need for government intervention. The most effective way for governments to bring down inflation is through higher interest rates.
With so much debt, and now higher interest rates. People, institutions, businesses, and banks all need to use more of their money to pay off their debt.
There’s a lot of debt in the system so the higher interest rates take a lot of money out of the economy.
People feel poorer.
Then they hear a bank is having trouble repaying their loans.
The TRUST they once had in the bank turns to worry and as they’re worried they see it is better to hold their own money or to hold their money in a different bank.
They go to withdraw their money and they might be able to, only as long as they’re quick to get it out. If they’re not chances are the bank does not have the money to give them, it was loaned out years ago to someone who cannot repay it back.
Remember it is legal for banks to hold 0% reserves, meaning they can lend out all of your money, legally. The money everybody thinks they have in the bank is not there.
The TRUST the individual once had for the banking system has now been broken.
Did the individual who lost their money do something wrong?
They have always been told to hold their money in banks.
Or, did the banks and government take as much advantage of the system as they could possibly take, using a predatory lending system with a monetary system that does not work to try and create as much profit at the risk and expense of the everyday citizen?
These banks and governments know what they’re doing is wrong. They don’t care. The system is designed for them, it is not designed for you and me.
They create the money for free, we work every day for it.
Don’t Trust Bitcoin
Bitcoin is not built on trust.
The entirety of the Bitcoin blockchain is built around an open-source ledger. This means everyone can see every Bitcoin transaction, all the time. Everybody knows where their Bitcoin is, and where everyone else’s Bitcoin is.
The design of Bitcoin is to only ever have 21 million coins. 19 million of these coins are already in circulation.
Bitcoin lasts forever. The same cannot be said for sea shells, or with our money today.
Currently, the new supply of Bitcoin is at 6.25 Bitcoin per block. This means miners are being rewarded with 6.25 new Bitcoin roughly every 10 minutes. This issuance will drop following the halving next year in 2024 (halvings occur every 4 years) and the next reward for miners will be 3.125 Bitcoin per block.
Stock = 19 million, will eventually be 21 million.
Flow = 6.25 Bitcoin per block at the time of writing, halves every 4 years.
This is the best stock-to-flow model that has ever been created. All whilst being built on the blockchain that is completely programmed in. There is no guessing involved with the issuance or total amount of Bitcoin. That fact cannot be said for anything else.
You don’t need to trust the issuance or the total supply of Bitcoin as it is built into the system.
Trust is an integral part of the banking system today. Without it, the entire system collapses. If nobody has trust in the banks they would take their money out immediately, causing banks to collapse.
As banks collapse, economies collapse and as economies collapse countries collapse.
Worse yet we wouldn’t have a clue where our money goes when we put it into the bank, our money could be anywhere.
Even though banks and governments do not do the right thing for us, they’re banking on the fact that we will trust them enough to do the right thing by them.
Our trust in this system is misguided.
When you put your money into Bitcoin it is there on the blockchain, you know it is there, and you know it will always be there.
Bitcoin doesn’t need your trust, it has operated just fine for 15 years without it.
We need to trust the banks to do the right thing, they don’t.
We don’t need to trust Bitcoin to do the right thing, it will anyway.
Don’t trust Bitcoin, you don’t need to.
