Ancient Rome’s Crypto Prophecy
The global economy is in crisis. Historically, governments have tried to recover from financial catastrophe the exact same way — by printing more money. We explore how this has only created more problems… and why cryptocurrencies could forever change how we store, exchange, and perceive wealth.
Fiscal stimulus.
That’s the official term governments and central banks use to describe money printing.
In March and April this year, Investopedia reports, the US announced $2.8 trillion in financial stimulus to its citizens.
The European Central Bank has announced nearly a billion euros in stimulus in Europe.
Governments from Hong Kong to the United Kingdom are scrambling to roll out their own emergency stimulus measures, as is the International Monetary Fund.
Bond buying programs, economic stimulus, money printing — these colossal programs amount to the same thing:
The devaluation of currency.
Value, according to economics, is a function of scarcity.
The rarer an asset, the more value it has.
The less rare an asset, the less value it has.
This means that as the world’s governments and financial institutions rush to alleviate the economic fallout of the COVID-19 pandemic…
They are diminishing the value of the currency already circulating in the system — in wallets, in bank accounts, in property, stocks, you name it.
As the world’s money grows less scarce, it grows less valuable.
It’s a problem that has caused economies and empires to crumble for thousands of years.
It’s also a problem that the newest form of currency — cryptocurrencies — could solve as the world emerges from the biggest global financial crisis since the Great Depression and the worst health crisis since the Spanish Flu about a 100 years ago.
To explain the problem and show why cryptocurrencies potentially offer something unprecedented in financial history, we need to go way back in time.
The Roman Lesson: Devaluing Currency Is A
Death Knell To Even The Mightiest Empire
At the height of its power, the Roman Empire controlled large swathes of Europe, Africa, and the Middle East.
The Romans created civilization as sophisticated as it was vast, making huge developments in virtually every area of society.
The Roman Empire thrived on trade.
Central to this trade was the silver coin.
When it first entered circulation, the Denarius coin contained about 4.5 grams of pure silver and enabled the empire’s citizens and organisations to do business, receive payment for goods and services, and store wealth for the future.
The coins had value because the silver in them was scarce.
So scarce, in fact, that as the years went by, Rome started to run out of silver with which to make its coins.
So what did they do?
They started minting more coins with less silver in them.
Over a century, the Denarius went from containing 75% pure silver to just 5%.
The government printed more and more of them with the same face value and less and less of the metal that gave them value in the first place.
While this created the illusion of more money in the system, the reality was that Rome’s debasement of its currency transferred wealth away from citizens and resulted in them having to use more and more coins.
The other word for this is inflation.
By the time the Roman Empire collapsed in the year 476, it was facing invasion on nearly every front, rampant political and social turmoil and outbreaks of plague.
Rome’s citizens had been robbed of their power to exchange and store wealth by successive governments and the empire no longer had the strength or cohesion to maintain itself.
According to Visual Capitalist, Rome’s experiment in debasing its currency to expand the supply of money created ‘hyperinflation, soaring taxes and worthless money…that dissolved much of Rome’s trade’.
This paralyzed the empire’s economy and plunged it towards collapse.
What does that remind you of?
What modern empire has been fighting multiple wars for the past century…
Suffering political upheaval…
Experiencing a growing wealth gap and ballooning government debt…
And trying to solve all its problems by dumping trillions of additional dollars into its economy?
The 2008 Credit Crisis: The U.S. Empire Attempts
To Get Out Of Trouble Using The Roman Method
In 2008, the world hit what we now call the Global Financial Crisis (GFC).
In the early 2000s, investment bankers in the U.S. got deeply into trading ‘sub-prime’ — low quality/high risk — mortgage-backed securities.
In other words, they were trading billions of dollars of high-risk debt from the property market.
This encouraged a property bubble, which burst and left millions of Americans suddenly deep in debt and with no home.
The bankers who were trading that debt were left with financial instruments that were suddenly worth nothing.
The property market and stock market both collapsed, dragging markets around the world with them (we live in a US-dollar dominated world, just as those in the Roman Empire lived in a Denarii-dominated one).
How did the U.S. Government and its central bank, the Federal Reserve, propose to get out of this situation?
By printing more money.
In the final quarter of 2008, the Bank of England, the European Central Bank, and the Federal Reserve bought a combined $2.5 trillion in bad debt and troubled assets from their respective governments.
While the central banks bailed out the governments, the governments bailed out the retail banking system, manufacturers, and other businesses.
They created new currency and injected it into the financial system.
The US alone added about $1 trillion of new money to the system in 2008 and 2009.
All this new money pouring into the system did exactly the same thing the Romans achieved when they attempted it.
It robbed people of their purchasing power by devaluing the currency.
More than 10 years on from the GFC and the Great Recession that followed, the numbers show we have less buying power than ever before.
For a sobering illustration of just how much value the U.S. Dollar has lost over the past century, check out this infographic from Visual Capitalist.
In the first decade of the 20th Century, the total amount of money in circulation in the U.S. was about $7 billion.
One dollar could buy you a pair of brand new patent leather shoes.
By the 1950s, there was $151 billion circulating.
A dollar couldn’t buy you a pair of patent leather shoes. It could buy a Mr. Potato Head toy.
Fast-forward to the 1980s and there were nearly $1.6 trillion dollars in the financial system.
The dollar could now get you just a single bottle of Heinz ketchup.
In the first decade of the new millennium, the money supply ballooned up to nearly $5 trillion.
Now, the dollar could only buy a Wendy’s hamburger.
By 2017, the money supply had grown to more than $13 trillion — almost five times what it was at the turn of the millennium.
And that single dollar that could buy you a brand new pair of patent leather shoes more than a century ago?
It now buys only a single song on iTunes.
So you can see that adding more dollars to the money supply may create the illusion of increased prosperity.
But when you measure the effect on buying power, you can see that — just as in ancient Rome — this process erodes buying power and wealth.
Which brings us to the situation the world is facing in 2020.
Governments And Central Banks Are Continuing This Trend In Their Financial Response To COVID-19
According to Yahoo Finance, the global financial response to the COVID-19 pandemic ‘has now overtaken the biggest year of spending during the financial crisis when measured as a percentage of world GDP’.
We’re in for another step up in currency devaluation and another hit in buying power.
Governments and central banks continue to pour new money into the system, robbing those living, earning, saving, and spending within the system of wealth.
If a dollar buys you a song on iTunes today, what will it buy you 10, 20, 50 years from now?
When will the system as we know it collapses, as it did when the Roman Empire expanded its money supply?
There are a lot of opinions about this, ranging from ‘you’re crazy to think the system will collapse’ to ‘what do you mean you don’t have a doomsday bunker filled with non-perishables and coffers of gold and silver?’.
We’re not saying the system is about to collapse, or suggesting you build a subterranean survival shelter on your property for the world’s imminent slide into barbarism.
We’re saying that as far as the value of money goes, history shows that our wealth is continually being undermined.
The economic response to the current pandemic is proof that this trend continues.
Cryptocurrencies are a new financial innovation that could end, or even reverse the deep and ancient trend of currency devaluation and economic inflation.
A New Currency That Grows More Valuable Over Time
Investopedia defines a cryptocurrency thus:
‘A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Many cryptocurrencies are decentralized networks based on blockchain technology — a distributed ledger enforced by a disparate network of computers. A defining feature of cryptocurrencies is that they are generally not issued by any central authority, rendering them theoretically immune to government interference or manipulation.’
Bitcoin — the original and still-dominant crypto — has two built-in characteristics that guard it against devaluation and inflation.
First, BTC miners must expend real-world resources — time, electricity and computer processing power — to add new coins to the supply.
Contrast that to a central bank, which can essentially create new money out of thin air.
Second, BTC has a finite supply.
Coded into its algorithm is a maximum number of coins.
That means when the last BTC is mined and added to the supply, there won’t be anymore.
Every four years or so the amount of BTC a miner receives for expending a given amount of energy halves.
You may have heard this referred to in the crypto world as ‘the halvening’.
The most recent halvening was in May this year.
The mining reward for BTC will continue to halve until we reach the maximum supply — 21 million.
This chart shows the crypto’s issuance rate decreasing over time.
Not all cryptos have this characteristic built in to them.
But there are around 300 others that operate in a similar way.
But when you consider this intrinsic, increasing scarcity, you can see why cryptos potentially offer a radical alternative to fiat currency.
Will this mean that the world will enter a new crypto-dominated monetary paradigm?
Some very influential people predict cryptos will only grow in popularity.
Quoted in the Nikkei Asian Review, Paul Tudor Jones, billionaire founder of the hedge fund Tudor Investment, said in a note to clients:
‘Bitcoin reminds me of gold when I first got into the business in 1976. If I am forced to forecast, my bet is [the best asset] will be bitcoin.’
These intrinsic characteristics mean cryptos could provide the first viable medium of exchange that will increase in value — not diminish.
That possibility is backed up by the fact that BTC and the other cryptos trading today do so on immutable blockchains — decentralized networks immune (in theory) to any central authority meddling.
Remember, of course, that central authority meddling is what devalued currency in ancient Rome and continues to do so in the U.S. and around the world today.
History Shows That Governments Devalue
Money Over Time — And That Currency Evolves
The Romans did it. Now the U.S., Europe and the rest of the world is doing it.
The money circulating in the financial system is worth less with every passing year.
Cryptos offer a potential solution to this ancient problem.
If you prefer to think of cryptocurrencies as a fad, then consider this.
A hundred thousand years ago, humans were already trading.
They swapped livestock for grain, clay pots for tools.
From there, we probably moved to a ‘gift economy’, where people would give one another items of value and expect to be repaid with something else of similar value in the future.
Between 9000 and 6000 BC, people probably started using livestock and plants as money.
These things were useful and able to be re-used. The more of them people offered, the more they could get from a trade.
Around 3000 BC, the Mesopotamian civilization began using ‘commodity money’ — an agreed weight of barley.
The Babylonians created the idea of debt. The Egyptians began using gold bars.
Between 1000 BC and 400 AD, China’s Zhou dynasty invented the first coins.
The early Mediterranean empires followed suit and introduced various coins into their economies — the Romans among them.
In the 11th Century, the Chinese innovated again, introducing the banknote.
The Europeans created trade bills of exchange, an early form of credit, while pioneering economists in the Middle East began to experiment with cheques, savings accounts, loans, exchange rates and more.
Starting in about 1450, the English began to make advances in banking and centralised monetary authority.
Their goldsmiths hoarded gold in a central vault and could issue promissory notes and checking accounts, becoming forerunners of credit-based money.
In 1971, President Nixon in the U.S. cancelled the ability to convert U.S. Dollars into gold, ending what we call ‘the gold standard’.
The dollar — still the world’s reserve currency today — was now floating on its own, untethered to the precious metal it used to represent.
Also in the 20th Century, humans created the computer.
By the 1990s, all money transferred between the central and commercial banks in the U.S. was done so electronically.
As the benefits of digital currency — primarily speed and convenience — became clear, we moved away from physical cash.
In 2012, probably more than half of the transactions in the U.S. were electronic.
Consider how many of your transactions have been electronic versus physical.
Now consider how bizarre and intangible that idea would seem to a farmer in the year 9000 BC.
Stack this history up against the currency devaluation trend we’ve explored today, and ask yourself:
Is cryptocurrency an internet pipe dream…
Or the logical next step in the human species’ thousands of years-long financial evolution?
