The History of Money: From Barter to Bitcoin, Part Three
In our previous publications, we examined the ancient history of money: from Cowrie shells to the first banknotes. We mentioned that IOUs, which were assigned to specific persons, evolved into universal banknotes, which were already valid from any bearer, and central banks achieved a monopoly on the issue of money.
Now let’s move on to the 19th, 20th and early 21st centuries.
Gold standard and its abolition
In past publications, we found out that banknotes became widespread in the 19th century. But then they did not yet possess value in themselves, but represented the value of precious metals that were stored in banks.
The gold standard was first introduced in the United Kingdom in 1821. Until that moment, the main world precious metal was silver. And although gold has long been periodically used for minting coins in various countries, it has not yet been a generally accepted standard. For the next 50 years, a bimetallic standard was used outside of England (when both gold and silver were considered the monetary standard), but in the 1870s Germany, France and the United States adopted a monometallic standard, where only gold was considered the monetary standard. The twentieth century can be called without exaggeration “the century of separation of money from the gold standard.” We can trace this by observing the history of the United States.
In 1913, Congress created the Federal Reserve (or simply the Fed) to stabilize the value of gold and currency in the United States. The Fed is a private bank that got the right to issue the dollar thanks to President Woodrow Wilson.
Soon after World War I broke out, the United States and European countries suspended the gold standard so that they could print enough money to pay for their participation in the war.
But even after the end of the First World War, the upheaval did not end. In 1929, the stock market crashed and the Great Depression began. The price of gold began to rise, people hastily exchanged dollars for it. During the crisis, people stopped trusting financial institutions and just started hoarding gold on their own.
The situation worsened when banks began to go bankrupt, which was the result of distrust of financial institutions.
On March 6, 1933, President Franklin Roosevelt closed banks in response to a massive seizure of the Fed’s gold reserves. By the time the banks reopened on March 13, they had already surrendered all their gold to the Fed. Banks could no longer exchange dollars for gold, and export of gold was no longer possible. Moreover, gold was also forcibly confiscated from the population. On April 5, 1933, Roosevelt signed Executive Order 6102, which forced Americans to exchange their gold in coins and bullion for dollars. Thanks to this initiative, Fort Knox still holds a huge reserve of gold.
Then World War II began, but the monetary system changed even before the world war ended. In 1944, the Bretton Woods monetary system replaced the gold standard. As a result of this reform, such large organizations as the International Bank for Reconstruction and Development and the International Monetary Fund appeared.
The final nail in the gold standard’s coffin was the Nixon shock. By his decision, President Richard Nixon completely severed the link between the dollar and gold. The final separation from gold made the dollar the standard of modern fiat currency. At the beginning of the 20th century, the dollar could be exchanged for gold, but now only for … purchasing power …
The Power of Central Banks
In the 20th century, central banks managed to concentrate enormous power around themselves. Many economists are of the opinion that it is the abuse of this power that has led to the current global financial crisis. For example, the American economist Milton Friedman co-authored with Anna J. Schwartz wrote the work
Monetary History of the United States, 1867–1960, which argued that the cause of the Great Depression was inadequate policy of the US Federal Reserve System, which was involved in printing dollars. But how did they get such power?
First, even before fiat money was separated from the gold standard, banks realized a terrible thing. The fact is that in a normal situation, it is unlikely that all depositors will go to take their money from the bank at the same time, which means that the bank can issue more money to depositors on credit than it can provide. This creates a dangerous temptation for banks to lend more and more. And, if loan commitments are not paid, or if depositors go to collect their savings at the same time, this can have catastrophic consequences.
Second, when paper money was separated from gold, there was little to keep central banks from printing money out of control. It would seem that the devaluation of the existing money supply, which may be evidenced by some macroeconomic indicators, should restrain uncontrolled printing, but in fact it is a form of hidden tax. The more money is printed, the more the value of the existing money supply will drop, which means that it will be more difficult to repay existing loans.
Thirdly, it is banks that often decide who to give loans and who does not. If a small player in the market defaults on debts, he may be denied a loan. On the contrary, a large player, which is in collusion with banks, can be provided with such a loan so that they can cheaply buy up the assets of those who have gone bankrupt.
All these factors created contradictions within the existing monetary system, which reached in 2008 and resulted in the Great Recession. Dissatisfaction with the existing monetary system grew and the alternative appeared soon.
In the same 2008, a person or group of people under the pseudonym “Satoshi Nakamoto” published a file that described the general principles and protocol of the peer-to-peer network. So, in the public field, the history of cryptocurrencies began, which we will talk about in our next publication.
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