Modern money is a curious creature. Officially, it is the debt of the nation that issues the currency, which makes it inherently a lack of value. Unofficially, it is a tool that governments and central banks use to manage the economy, and keep their captive audience in-line.
Cryptocurrencies are the natural evolution of free market ideals that helped to create global wealth on a scale that couldn’t be imagined a few hundred years ago, and they may be what ensures that humans are able to maintain the current standard of living in the medium-term.
As hard-line post 20th century politics play an increasing role in the global economy, the risks of a worldwide Venezuela-style economic meltdown rise. Central planning has a poor record in the world of economics. Large centrally planned economies were spectacular failures in the last century.
The adoption and use of a specific type of money, as we will see, is a political necessity far more than an economic one. That is why Western (US-led) fiat currency was able to thrive, and it is also one of the driving forces behind the global crypto revolution.
Modern Money is a Political Tool
When World One broke out in 1914, money was gold or silver. Every nation had a peg for its currency, but the underlying value of money was derived from a precious metal. By the time the US entered the Second World War in 1941, the base of money’s value was still gold, but US citizens were no longer allowed to own the yellow metal.
As the American War in Vietnam was grinding on, a curious thing happened. In 1971, then-US President Nixon decided to end the convertibility of the US dollar to gold. This political action ended the role of gold as a basis for the value of money in the Western world, and created the fiat currency era we currently live in.
Gold had been used to establish the value of the US dollar at the Bretton Woods Conference (Which led to the Bretton Woods Agreement), in 1944. People couldn’t redeem their US dollars for gold, but other nation could (at least until 1971).
The curious thing from an economic perspective is why Western nations continued to accept the US dollar as a basis for the global economy? Also, why were there no competing monetary systems popping up in the wake of Nixon’s move to suspend gold redemption from US reserves?
Of course, the answer to both questions is simple. The West had no other alternative. The USA was still the muscle that backed up the post-Yalta global political order, and unless a nation wanted to ‘Go Red’, and swap the USA for the USSR, the US dollar was the currency of ‘choice’.
Bye Bye Bretton Woods
As we all know from real-world 20th century social experiments, centrally planned economies have a shelf life. Based on what we know, a centrally planned economy will either adopt market economics, or fail. The USSR didn’t adopt market economics (like China did), so in late 1991, it fell apart in spectacular fashion.
The issues that are currently manifesting in the global economy are directly related to the fall of the USSR. When the Soviet empire fell, the Western political mandate to support the US dollar disappeared. In a sense, the end of the USSR ended the reign of the US dollar, although this socioeconomic dynamic has taken decades to play out.
One of the most important factors that has supported the US dollar, and by extension, the Western financial system in the new millennium, is the total lack of a competing monetary system. Even if two nations want to work outside the Western financial system (say China and Iran), doing so means creating new transactional networks to facilitate trade.
Any system that is created as a workaround to the Western financial system will be a one-off. Meaning that China and Iran can use their new system to clear oil trades, but they will be doing so with two currencies that may be difficult to use with third-parties.
Cryptos are the first solution to the problem of a highly political Western financial monopoly, and they have hit the markets hard. The economic effects of cryptocurrencies have yet to be felt, but the ideological impact has been substantial.
Your Money = Your Freedom
It is impossible to separate the modern view of money from the Western ideals that created human rights in the sense we know them today. The idea that a person can possess money that they are free to use in any legal way isn’t very old. A few hundred years ago this level of freedom didn’t even exist in the West.
While many nations may be one-party states, the people in those nations have a tremendous amount of economic freedom because of our modern view toward money. As the 21st century matures, it is clear that economic freedom and sound money aren’t high on the list of priorities for central banks and world governments.
The US dollar has been weaponized, and is being used to punish any nation that doesn’t fit into Washington DC’s increasingly narrow worldview. These heavy-handed political actions by the world’s largest economy have left other nations in a lurch, and people everywhere wondering how the last chapter of the Bretton Woods saga will play out.
Cryptos are an Interesting Innovation
There was no Bretton Woods Conference in antiquity that established the value of gold and silver as global currencies. The two precious metals just had value. In many ways, cryptocurrencies have hit on the same part of human psychology that projects value onto metal, but in a very different way.
Modern money, as we have seen, is a product of political will. Not in the sense that it is voted on, but more in the sense that the Western monetary system is a product that was designed by the political class. Cryptos don’t fit into this mold, which makes them an existential threat to financial system that the powers-that-be rely on to maintain control.
Cryptocurrencies have come into existence without the help of any specific group. Even if there is a shadowy cabal behind the scenes in the world of Bitcoin, there is no way that group could have used any sort of (political) manipulation to make Bitcoin or other tokens popular around the world.
As a non-political currency with no state affiliations, Bitcoin sits in a very odd space within the global monetary system. The design, development, and build-out of the Bitcoin network has no central organizing force, nor is it being undertaken due to political necessity. Given these factors, it is fair to wonder why people are turning to a stateless digital currency on a global scale.
Keeping the System Fair
The move to embrace cryptos around the world has been surprisingly fast. Bitcoin was a pet project a decade ago, and now it is being used to circumvent global clearing systems, like SWIFT. While Bitcoin isn’t a great option for retail payments, it is very good when it comes to moving large amounts of value internationally.
In addition to letting people move value between nations, Bitcoin also has been a help to people in countries with terrible currency problems. Bitcoin’s value may look volatile when compared to US Dollars or Euros, but when it is denominated in Turkish Lira or Argentine Pesos, it starts to look a lot more like a store of value than a speculative asset.
People need a way to save value and do business. For a long time governments have been trusted with creating money to fill this role, but that appears to be changing. While most governments aren’t at all open to the idea of having their ability to regulate currency taken into a decentralized system, it may not be within their control to stop.
Governments are Behind the Curve
It doesn’t really matter if a person supports the idea of governments regulating a monetary system or not. In the modern world there are few effective governments when it comes to keeping their financial system in check. Even the largest nations in the world struggle with financial stability, even with increasingly heavy-handed regulations.
It is hard to draw the line between a centrally planned economy, and one that is regulated to the point where only major banks (including the central bank) have any amount of economic freedom. When that line is even approached, the medium and long term economic consequences are likely to be dire.
Most people don’t pay attention to the value of their currency, or the stability of the financial system until there is a problem. It seems that there are people out there who are aware of the precarious nature of modern money, and by extension, the global economic system.
Cryptocurrency was born at a time when the Western financial system shifted into a new phase, which could easily be its last. With the advent of what the US FED calls ‘Quantitative Easing’, the global financial system entered a time that may mark the end of our modern experiment with unbacked fiat currency.
A Problem of Control
Governments have given a monopoly to a system that simply can’t last. Bitcoin isn’t a perfect system, but it is a viable replacement for the SWIFT platform, especially for larger international transfers. SWIFT has been given monopoly status by the global banking cartel, and this is only one example of how vulnerable the current financial system is to being replaced by new technology.
As long as nations insist on creating monopolistic financial systems that are controlled by trans-national cartels, these systems will be the targeted by decentralized technologies that seek to give people around the world a viable option for equitable economic interaction.
The recent trade war between the USA and China demonstrates how quickly a long-established economic relationship can be adversely affected by a political mandate, and the same thing could easily happen on a much larger scale if relationships between major governments deteriorate further.
Cryptocurrencies give people an option to own a valuable digital asset that can be used to facilitate trade, which doesn’t rely on a government to have value. As the next few decades roll on, we may see how valuable these new ideas truly are, as governments struggle to perpetuate economic systems that are stretched to their limits.