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  • Writer's pictureErich Schwerd


Bitcoin has been in the news lately, but the anchors themselves ask after every bit, why is this in the news, since it only concerns a few people and has nothing to do with the greater economy. Well, Bitcoin is relevant, and is an important issue for the general public.

Economic activity started with the barter system. Individuals would agree to trade two cows for four goats or whatever. Generally speaking, currency is any medium of exchange, meaning cows and goats could be currency.

However, modern currency, those bank notes or coins that we use today, derive from the receipt system in ancient Egypt. In ancient China and the ancient Middle East, various negotiable instruments were created to facilitate commerce. The problem with this was that there was no legal framework with which to regulate printing and acceptance of currency. This would lead to bubbles and huge fluctuations in the value of the currency.

Enter “Specie”, which required currency to be convertible into a fixed hard asset, usually gold or silver. You could on demand exchange your cash for gold or silver coins. The use of gold as currency began in Asia minor. In Europe, silver was used, and in Scandinavia, it was copper. Again, this form of currency did not work. It was not economically feasible to allow exchange and currency value fluctuated drastically based on the constant change in reserves.

The gold exchange standard allowed countries to peg their currency to the value of gold or silver. This gold exchange standard lasted from the early 1800’s to the early 1900’s. World War I caused a run on the banks in Britain, forcing abandonment of the gold standard and leading to severe inflation. While many countries attempted to return to the gold standard, the great depression resulted in its permanent demise.

“Fiat” money was introduced. Countries could print money that was backed simply by the monetary authority. Monetary policy, the ability to print money not backed by a hard asset, was used throughout Europe and North America to end the depression by inflating asset prices.

However, Fiat money has problems of its own. Rather, monetary policy does. John Maynard Keynes is reported as saying: ”By a continuous process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily, and while the process impoverishes many, it actually enriches some” (Keynes, John Maynard, “Economic Consequences of the Peace (1920)).

A brief return to the gold standard was attempted in 1944, when the US agreed to a fixed value of $35 per troy ounce of Gold. Other currencies were pegged to the US dollar, and the US dollar became the world’s reserve currency. However, this ended abruptly in 1971 when President Nixon ended the international convertibility of the dollar to gold.

Since then, all currency around the world has been fiat money, and today, no country uses the gold standard. Fiat money has no intrinsic value and is backed solely by the full faith and credit of the authorizing country and its empowered central bank. Fiat money can also be created by non-governmental groups or communities to facilitate trades that would not otherwise be possible. One immediately thinks of illicit trades, but the points and credit systems for airlines, credit cards, and other services are a type of currency.

Enter Bitcoin: “Bitcoin is a peer-to-peer payment system and digital currency, introduced as open source software in 2009 by pseudonymous developer Satoshi Nakamoto” (Wikipedia). Bitcoins have gained popularity globally, and not just in illicit circles. While there is a speculative element to the use of bitcoins, it does have supranational uses, making transfers of funds easier across countries. It also has value as a set currency. Unlike national currencies, Bitcoin’s money supply is predefined by the protocol. The total supply of bitcoin is capped at 21 million, with 25 bitcoins created every ten minutes (Id.). While the current protocol will not work, a modification of the protocol could result in a true extra-national hard currency that cannot be manipulated to weaken the currency, inflate asset prices, or in other ways manipulate what could be sound economic principles. That would result in a universal single currency that would level the global economic playing field.

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