Bitcoin — The Next World Reserve Currency? History Often Rhymes…
Could Bitcoin become the world’s reserve currency? Some may find this absurd or amusing. However, history shows that reserve currency status has changed considerably over time. We, as humans, decide which currency is the most valuable, and our idea of value has evolved throughout time.
Many people, including us, believe that Bitcoin is the best form of money ever created. To understand why, read this in-depth analysis of Bitcoin:
As a result, it’s not too far-fetched to believe that it may one day become one of the world’s reserve currencies. Aside from Bitcoin, let’s take a look at the history of the world’s reserve currencies.
What is the World’s Reserve Currency?
The role of the world’s reserve currency is unique in the global economy. It is the currency maintained in reserve by sovereigns, central banks, banks, and major corporations to support global trade, finance and transactions. The US Dollar is the world’s reserve currency today, and has been since the early twentieth century, but that was not always the case.
The Rise and Fall of the World’s Reserve Currencies
Byzantine Solidus: 312 to 1250
Image source: wikipedia.org
The Byzantine Empire created the world’s most popular reserve currency. For almost 1,000 years — ten times longer than the US dollar — the Byzantine currency dominated global trade. For centuries, merchants throughout Europe, the Mediterranean, the Middle East, and beyond used it to trade.
It was known as the solidus, and it was first introduced by Constantine I in 312 AD. For over seven centuries, the solidus held steady at 4.5 grams of 24-carat gold. As a result, its Latin name translates as “solid.” The durability of its purity is nearly unprecedented in the history of money.
It was the symbol of imperial power in Byzantium. It was adored and copied by many monarchs in many countries throughout the then-known world, yet there was no coin that could be matched to it. The solidus was the primary commerce coin from Europe to Asia — the Middle Ages’ equivalent of the dollar.
Image source: encyclopedia Britannica
The weight, size, and purity of solidus remained unchanged until the 10th century, when the government began to debase it. The debasement began gradually and then accelerated rapidly. Its gold content was reduced to virtually nil in a span of decades as the Byzantine Empire struggled to fund its multiple wars.
As the rest of the world watched the gold content plummet, they soon lost faith. By that time, the Byzantine Empire was a shell of its former self, and solidus was no longer in existence.
Meanwhile, other kingdoms in Italy, particularly Florence and Venice, were prospering.
Florentine Florin & Venetian Ducat: 1250 to 1450
Image source: coinworld.com; Florin (Left) and Ducat (Right);
When the florin was first minted in the 13th century, it swiftly expanded throughout Western Europe, being generally accepted as the coin used in trade, debt, and accounting.
In many respects, the florin was the first modern currency. Aspects of our current system may be seen forming back then. Modern accounting, for example, enabled the Medici bank to balance its accounts across branches, reducing the need to move gold across the continent.
In the 1400s, the Venetian ducat achieved widespread worldwide appeal. The ducat contained over 99% of fine gold, which was the highest purity possible at the time.
The ducat became an internationally acknowledged trade currency throughout the world as Venetian traders went far and wide. Even though Leonardo da Vinci did not live in Venice, the King of France paid him in Venetian ducats — about 400 ducats per year, which in today’s dollars equals to roughly $56,000. The Venetian coin was widely used in the Levant, Anatolia, the Black Sea, and the Adriatic.
The ducat and the florin could be looked at as a single Italian reserve currency.
Image source: raabcollection; rare document from the heart of the Medici banking empire in Renaissance Italy, mentioning loans, credits, and exchange rates, 1459.
In the 15th century, florins underwent debasement in numerous parts of Western Europe, resulting in a division between lower and higher grade florins. The debased coins were later renamed “guldens,” while the higher grade florins were reissued as ducats. As a result, by 1450, the name ducat encompassed most of what was formerly known as the florin.
However, with the advent of the Age of Exploration in the early 16th century, the ducat was eventually superseded. The monetary epicenter has migrated westward, away from Italy.
Portuguese Real: 1450 to 1530
Image source: coinweek.com
The Portuguese Real was the dominant currency as Portugal grew into a worldwide economic empire as a result of advances in navigational technology that enabled them to access new markets in Africa, Asia, and, ultimately, America once it was discovered. The Real was a naturally rare silver coin with a rather consistent weight.
However, due to the Portuguese succession issue, Spain invaded Portugal and joined the two kingdoms to form the Iberian Union, resulting in the creation of a new world reserve currency.
Spanish Dollar (Pieces of Eight): 1530 to 1640
Image source: commons.wikimedia.org
Pieces of Eight became so common in foreign commerce that they were considered legal tender in the United States until the mid-nineteenth century. It was minted during the reign of the Spanish Empire.
This transition was prompted by a number of significant historical events. For starters, Christopher Columbus’ transatlantic journeys between 1492–1500 opened up what was known as the “New World” for colonization by Western European nations, which was funded by Spain. Second, in 1535, the Viceroyalty of New Spain was established.
New Spain, an essential element of the Spanish Empire, governed a vast territory that encompassed what is now Mexico, much of the Southwestern United States and California in North America, Central America, northern sections of South America, and many Pacific Ocean archipelagos.
It was one of the most powerful empires in the world throughout the early modern period.
Image source: thehistoryofengland.co.uk
Economic troubles triggered a chain reaction in Spain’s economy, destroying its wealth and leading to the Empire’s long-term decline.
For one thing, vast quantities of silver initially encouraged the Spanish monarchy to amass massive debts, always with the expectation that it would be able to repay the obligations in a timely manner through silver shipments.
Second, there was the Dutch War of Independence, commonly known as the 80-year war. As one might expect in an 80-year war, there were many ups and downs, such as the humiliation of the Spanish Armada, but for our purposes, the Twelve Year Truce signed by Phillip III in 1609 marked the end of the first part of the conflict. With this cease-fire agreement, Spain essentially recognized the United Provinces of the Netherlands as a separate state, heralding the end of Spain’s worldwide leadership.
Dutch Guilder: 1640 to 1720
Image source: commons.wikimedia.org
When the Dutch gained sufficient strength in 1581, they defeated the Spanish and went on to surpass both the Spanish and the Chinese as the world’s richest empire from roughly 1625 until their demise in 1780.
In 1602 the Dutch formed the first listed public corporation (the Dutch East India Company) and the first stock market, as well as the first well-developed lending mechanism that allowed debt to be produced more readily. A large number of individuals were jointly lending money and purchasing ownership in profitable ventures.
The Dutch’s various investment market innovations attracted investors, resulting in Amsterdam’s rise to prominence as the world’s leading financial hub.
The Dutch empire became stronger as a result of these traits and strengths, and the Dutch guilder became the world’s reserve currency outside of gold and silver, stretching over most of the world and having its currency widely recognized.
Image source: collections.rmg.co.uk
The British, who were rising in power, challenged the Dutch, resulting in the Anglo-Dutch Wars. The British won both economically and militarily. The Dutch were insolvent, and as a result, their debt and equity, as well as the Dutch guilder and empire, all collapsed.
French Franc: 1720 to 1815
Image source: wikipedia.org
The growth of the French colonial empire, which included the overseas colonies, protectorates, and mandate regions that came under French administration beginning in the 16th century, resulted in a time of enormous political and economic strength. In the 17th century, France began to build colonies in North America, the Caribbean, and India.
Following the French Revolution, Napoleon Bonaparte was crowned Emperor of France with the introduction of a new gold franc containing 290.32 grammes of gold in 1803. This new currency, and its incarnations, were known as “Gold Napoleons” and were widely renowned for their sound money status.
Throughout this time period the franc expanded to become a prominent worldwide currency.
Image source: wn.com
There was a lot of warfare between countries with diverse shifting alliances inside Europe at the time, in the late 18th century. After defeating the Dutch, the British and their allies resumed the Napoleonic Wars against the French commanded by Napoleon. After nearly a quarter-century of constant conflict since the French Revolution began, the British and their allies finally triumphed in 1815.
Great British Pound: 1815 to 1920
Image source: allgoldcoins.co.uk
After the war, victorious states convened to establish a new world order. The Congress of Vienna was the name given to this gathering. The winning powers re-engineered the debt, monetary, and geopolitical systems, and established a fresh beginning as outlined in the Treaty of Paris. That laid the ground for the United Kingdom’s 100-year “imperial century,” during which the United Kingdom became the unchallenged international power, the British pound became the world’s reserve currency.
The British used a capitalist framework to reward and fund collective labor. The British East India Company surpassed the Dutch East India Company as the world’s most powerful commercial force. Naturally, London took over as the world’s financial hub, and it has continued to invent financial products.
The innovative and affluent boom that lasted from 1870 to 1914 was known as the Second Industrial Revolution.
Image source: commons.wikimedia.org
During the nineteenth and early part of the twentieth centuries, the pound sterling was the major reserve currency of most of the world. That position ended when the United Kingdom nearly bankrupted itself during World War I, which lasted from 1914 to 1918. Britain was left weaker and disinterested in its empire as a result of the conflict. In addition, several sections of the empire contributed men and resources to the war effort and adopted a more autonomous stance.
United States Dollar: 1920 to NOW
Image source: commons.wikimedia.org
Following World War I, the United States and the US dollar rose to prominence as the world’s reserve currency. The first US dollar was printed in 1914, following the establishment of the Federal Reserve Bank. During World War I, the Allies paid the United States in gold for supplies.
After the first world war the victorious nations convened in Paris to establish a new world order, which culminated in the Treaty of Versailles in 1919, in which the losing powers were put deeply into debt to pay back the war costs in gold.
As it did in World War I, the United States entered World War II after the fighting had begun. Prior to entering the war, the United States was the principal provider of weaponry and other products to the Allies. Most countries paid in gold, leading the United States to become the world’s largest holder of gold.
Bretton Woods Agreement
Image source: historytoday.com
In 1944, delegates from 44 Allied countries convened in Bretton Woods, New Hampshire, to devise a system for managing foreign exchange. The delegation decided that the world’s currencies would no longer be tied to gold, but rather pegged to the US dollar, which was tied to gold reserves.
However, in order to manage inflation and prevent other nations from overburdening the economy by redeeming their dollars for gold, the United States abandoned the gold standard in 1971. The US dollar has now become the world’s first reserve currency that is not backed by actual gold or anything else, and the world has entered a fiat-money era.
Fiat money refers to any form of money that has been declared legal currency by a government order. A legal-tender paper money that have face values far exceeding their commodity values and are not redeemable in gold or silver.
The Decline of US Dollar
According to the Federal Reserve, dollars account for nearly 60% of global trade. When a country generates a lot of extra dollars through trade, it usually invests them in US government debt, often known as US treasuries. These yield a small amount of interest, making them a kind of foreign-country savings account. Because of the enormous scale of the US treasury market, it’s simple to acquire and sell US treasuries with little price volatility. This is extremely beneficial to the US government since it helps it to fund its activities by selling loans to foreign countries, and the ongoing demand for dollars in international commerce ensures that inflation remains relatively low even when a lot of dollars are printed.
However, this trend has been shifting for decades.
Global Currency Reserves of USD 1999–2021
Image source: IMF
Today, the U.S. economy is showing signs of slowing down, based on GDP growth. According to the IMF’s official foreign exchange reserves for 2021, central banks’ share of US dollar reserves decreased to 59%, the lowest level in 25 years. The dollar’s purchase power has declined dramatically over the previous few decades, owing to periodic money printing manias to address economic crises.
The dollar is beginning to lose importance in global markets as a result of its struggles and the rise of economic powerhouses such as China, with some pushing for its abolition as the world’s reserve currency.
Furthermore, recently the world’s largest oil exporter, Saudi Arabia, are considering accepting Chinese yuan instead of dollars. This is significant, as shifting just part of a global oil trade into the yuan is potentially huge. Oil is the world’s most traded commodity, with an annual trade value of around $14 trillion, roughly equivalent to China’s gross domestic product last year.
As we’ve seen recently with the outbreak of the Russian-Ukrainian war, weaponizing the dollar through trade, financial, and technological restrictions might speed the transition. Strategic adversaries of the United States, such as China and Russia, are already diversifying away from dollar assets that can be sanctioned or seized.
Image source: Changing World Order, Ray Dalio
China is on the rise, having already overtaken the United States as the EU’s main trading partner. With China projected to replace the United States as the world’s largest economy in nominal terms before 2030, could a new global reserve currency emerge?
The Next World Reserve Currency?
Image source: coindesk.com
Could the yuan become the world’s next reserve currency? We’ve seen China provide a greater freedom into its own exchange rate, gradually loosening certain capital regulations, and opening up new loan markets. It has encouraged more trading and persuaded investment partners to accept the yuan as a unit of account, a method of payment, and a store of value, including in foreign reserves. It’s developing an alternative to the western-led SWIFT system, as well as a digital yuan that might be internationalized in the future. And its own internet behemoths are building massive e-commerce and digital-payments networks, such as Alipay and WeChat Pay.
However, talking about money isn’t enough. How many people fully comprehend the yuan’s dynamics? Perhaps as many as the State Council’s 35 members. The biggest disadvantage of the yuan will be its lack of transparency. The main reason countries choose the dollar is for its stability, transparency and trust. However, the the US dollar is far from perfect, and confidence is diminishing over time, but isn’t it the best option we have?
Image source: analyticsinsight.net
Bitcoin is no longer an obscure currency on the internet. According to a Nasdaq report from October 2021, Bitcoin has surpassed the Swiss franc to become the world’s thirteenth biggest currency. It’s an astounding achievement given that Bitcoin has only been in existence for 13 years. Bitcoin is the world’s fastest growing payment network, with yearly payment transaction volumes exceeding $3 trillion (of economic value) surpassing American Express.
Bitcoin is being amassed by retail, institutions, governments, pension funds, REITs, and banks alike.
Image source: buybitcoinworldwide.com
Bitcoin’s potential is limitless. One Satoshi might be worth $1, $10, or $100, making it infinitely scalable. Despite being dubbed “slow,” it’s capable of providing instant payment settlement over a network of participants by employing its Layer-2 scaling tech, known as the Lightning Network.
What is key to understand here is that, unlike fiat, Bitcoin was never imposed on people by legislation; rather, individuals opted to interact with it, mostly because of its concept of censorship-free money.
The concept of freedom is the essential metric here, which is why we believe the Yuan isn’t likely to ever become the world’s reserve currency. Humanity is moving away from centralized authority, and faith in central banks is at an all-time low. For example, according to a Reuters poll, 66% of citizens in the United Kingdom do not trust banks to act in the best interests of society.
Even in nations where governments do not favor Bitcoin use, high levels of citizen acceptance can compel the government to act. Two notable examples are Nigeria and Turkey.
Grassroots citizen adoption is gaining traction in nations throughout the world.
Image source: triple-a.io
Currency manipulation has also been a major problem in the global currency markets on several occasions. Governments devalue their national currencies in respect to other currencies on a regular basis in order to obtain a competitive edge over other countries.
History demonstrates unequivocally that nothing lasts forever and believing that the dollar is invincible is naive. Technology is altering our whole civilization.
Using a neutral currency like Bitcoin as a worldwide reserve would leave little room for manipulation, fostering a more equitable and productive financial system for all nations.
The fact is that none of us knows what the future holds, but we do know that for thousands of years history has dethroned countless empires and their reserve currencies, and it will happen again.
DISCLAIMER: The information contained in this article is for educational purposes only and does not constitute any form of advice or recommendation by Wheatstones, and is not intended to be relied upon by users in making (or refraining from making) any investment decisions.
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