Tether’s good run: It’s as old as the microprocessor
Literally. There’s no causal link, just a coincidence. But still.
In the spring of 1971, Janis Joplin’s rendition of Kris Kristofferson’s “Me and Bobby McGee” topped the charts. Your technophile friend just bought the first cassette recorder in the neighborhood. And a Santa Clara startup called Intel just sold their first patent, for the Model 4004 four-bit central processing unit, to a Japanese company that rose out of the ashes of
World War Two. The 740 kHz spark plug powered Busicom’s line of electric adding machines.
And that has nothing to do with anything.
But five months later, the Bee Gees were dominating the airwaves with the tearjerker “How Can You Mend a Broken Heart”. Retail managers coming back from their August vacations were sending orders to Mattel for what they
knew would be the breakout toy for the upcoming holiday season: Malibu Barbie.
And President Richard Nixon — about whom I’m lately a misty-eyed nostalgiac — took pen in hand and ended the global financial schema that had governed the world’s markets since the plot to kill Hitler (July 20, 1944, was a busy news day). Known as the Bretton Woods system, it was designed to take all currencies off the gold standard and peg them to the U.S. dollar, which itself would be pegged to 1/35th of a troy ounce of gold. In the mid-1940s, when Fort Knox held 70% of the world’s gold bars, it made very little difference. But times change and, if currencies can’t float against each other, the friction will show up elsewhere:
trade imbalances, shortages of goods and weaker economies’ currencies being devalued.
The British pound started out pegged to $4.03 but was soon lowered to $2.80. What was that like for the Brits? Imagine you’re accustomed to paying $12 for a movie ticket but you and your date walk up to the box office window and suddenly it’s $16 each. Same thing at the snack bar. And at the tavern. And your rent and utilities. And everything else. Like that.
So it worked out pretty well for us Americans, at least at first. But at some point Vietnam got to be an expensive habit in both blood and treasure. And Nixon was not about to raise taxes. That’s what those tax-and-spend liberals did, and Nixon was quite the opposite. He was a borrow-and-spend conservative. So our taxes stayed low, but the invisible tax of increased debt and the resulting higher interest rates eventually led to a round of inflation that was kept in check because, by being locked into the Bretton Woods system, the rest of the world was bailing us out.
Remember what happened the last time the Germans were overburdened with war reparations? In May 1971 it was still pretty fresh in their minds. So the Bundesbank cashed in its dollars, loaded up the railcars with gold and the most fully recovered economy in Europe quit Bretton Woods.
Another thing fresh on everyone’s minds was 1929’s run on the banks. You probably know by heart that scene from It’s a Wonderful Life where Jimmy Stewart is trying to talk everyone in Bedford Falls into leaving at least some of their savings in the Building & Loan so it wouldn’t default? That’s what America was doing with every country in the world that no longer wanted those shrinking dollars. They wanted the gold that was supposedly backing it.
So Tricky talked it over with his economic advisors and temporarily closed the gold window at the Federal Reserve. We’re still waiting for it to reopen. That Sunday, August 15, 1971, was the day the dollar went off the gold standard and became the first free-floating currency. And everyone else had to use it as a reserve. Why? Because America still had a plurality of the world’s gold and wasn’t in a mood to give it back.
The dollar was given a disparaging label. You know the disdain in the voices of fiat currency advocates when they form the word “cryptocurrency”? The dollar was referred to in similarly dismissive terms.
It was called a “fiat currency”. Ironic, huh?
History does not repeat itself, but it rhymes. — Mark Twain, purportedly
It’s important to note that Nixon really didn’t have much of a choice. It was either end Bretton Woods or turn an inevitable dollar devaluation into a full-blown hyperinflationary crisis. The move was not in itself intended as an up-yours to the rest of the world even though that was the result. Nixon was nobody’s isolationist. He went to China. He established detente with the Soviet Union. He overthrew the Chilean government. He bankrolled the Sinai War. He bombed Cambodia. He sent troops to Vietnam. And the moon.
But no less an economist — and lefty — as Paul Krugman thinks the so-called Nixon Shock was the right call, heading off what could’ve been a nightmarish depression in the 1980s.
It was just a matter of time before every other major sovereign denomination became a fiat currency, and the term lost its pejorative meaning. And I have every confidence that’s already happening with crypto.
Which brings us to Tether, which is really just greenbacks on the blockchain. Lots of sovereign currencies are pegged 1:1 to the buck. The only difference between a Barbadian dollar and a U.S. dollar is one has a picture of the Queen.
So Tether sounded like a good idea. What could go possibly go wrong?
Well first, you don’t get involved in money laundering. Second you don’t get caught.
Third, you don’t screw with the U.S.-Taiwan trade relationship. Fourth, you don’t leave Wells Fargo holding the bag.
Fifth, you don’t keep your books so sloppily if not fraudulently that the auditor you’re paying to tell the world that the dollars you’re pegged to actually exist refuses to write those words and hit send.
But you know what? If it wouldn’t have been a self-inflicted wound, it would’ve been something else with Tether. It was too small an idea.
The tokenized future is a breakaway region of the world’s economy infused with the spirit of revolution. Efforts to build the superhighway there before the trails have been blazed is doomed to fail. Tether wanted to be the cuddly teddy bear that people used to holding dollar bills in their hands could grab onto as they made their baby steps into crypto. But there just isn’t room for such pee-pants here.
Same goes for Ripple, sad to say. I wish it could work — training wheels for banking interests moving onto blockchain platforms. That’s fine, but sooner or later they’ll get where they wanted to go and have no further need for Ripple.
The centre cannot hold. — William Butler Yeats
Ripple will soon find itself in the company of other moderates who have seen their dreams of a future based on reason rather than passion dashed: Alexander Kerensky. Anwar Sadat. Hillary Clinton.
But as sure as fiat currencies succeeded commodity currencies, cryptocurrencies will succeed fiat currencies.
Any discussion of “which one” will dominate engages in the kind of short-term thinking important to day-traders but otherwise misses the point. It won’t be a single currency. There will always be some competition — probably not as many players as we have now, but certainly enough that the exchanges are in no immediate danger of outliving their business models.
The evolution will go on, as technology advances and enables not only new hardware and software but new business innovations. So the question “which one” has to be matched to another constraint: “until when?”
