Gold is money – everything else is fiat

This article is also available in German on Inside Paradeplatz.

Gold is an almost ideal money. Read a brief overview of the medium of money from its beginnings to Bitcoin, and what your government is planning for the future of your money.

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Why gold is valuable

Only five elements of the periodic table are considered precious metals. These are gold, silver, platinum, palladium and rhodium. Precious metals are stable, do not corrode and they are rare, which makes them valuable. Gold and silver were already known in ancient times and were therefore used as a medium of exchange. The first documented use of gold coins as money took place in Lydia in the 6th century BC under the reign of King Croesus, in the form of electron, an alloy of gold and silver.

Source: https://www.worldhistory.org/article/1793/the-invention-of-the-first-coinage-in-ancient-lydi/

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Why do we need money

A monetary medium serves as a means of exchange and as a store of value. For this purpose, the money used must be recognized as valuable, divisible and easily transportable. The value of money is generally controlled by scarcity. Gold fulfills all these conditions, except that it becomes unwieldy in larger quantities due to its specific weight.

Money makes bartering possible and thus a division of labor within a community. With a monetary medium that guarantees a value, "trustless" transactions can then also be carried out between parties that are not known to each other. This enables specialization beyond the local community and thus innovation and the higher development of a society. The functional differentiation of human labor has made our highly technical civilization of today possible.

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How money is created

Over the centuries, various monetary systems have emerged and passed, mostly closely linked to the rise and fall of civilizations, empires, city-states and nations. The money medium itself evolved over time from exchange with raw materials, to exchange with coinage of precious metals, to exchange with coinage of base metals, to exchange with promissory bills, and finally to exchange with banknotes, which emerged from promissory bills. Here, paper money represented an important innovation for long-distance trade, as it made the transport of even large cash holdings easier and safer.

Commodities or precious metals are "natural money" because they are based on a natural resource. They have no counterparty risk, because they are the value. All forms of money which only symbolize value, i.e. are symbolic money, such as non-precious coinage and paper money, require a counterparty to guarantee the value issued.

In addition to the very first money made of plant fiber paper in ancient China, paper money began to establish itself in Europe from the Middle Ages onward. The merchant houses of the time acted as the first financial institutions and as trusted counterparties. They took deposits and in return gave a paper to the depositor promising to return it – an early form of a bank bill. The deposits were then used as collateral to make loans to farmers and merchants. Since not all depositors demanded their deposits back at the same time, loans could be issued that were only partially covered by the deposits.

This "fractional reserve" principle, on which our modern banking system is also based, allows the creation of new money based on trust in the issuing institution. Money created in this way is unbacked and is created as debt, repayable with interest. Such a system allows the money supply to be adjusted according to societal needs, without first having to procure precious metals, with the disadvantage that it lives purely on trust in the issuing institution.

If depositors lose confidence that their deposits can be returned, a "bank run" occurs. A well-known example from history is the bankruptcy of France in the course of the bankruptcy of the French National Bank in 1720. The bank had speculated on trading transactions in the French overseas colonies in America and became insolvent (keyword "Mississippi Bubble"). More recent is the collapse of the Spar- und Leihkasse Thun in 1971, or most recently of the Silicon Valley Bank.

The debt money system also has the characteristic that the additionally required interest money is not created and for the repayment of interest always further debt money must be newly created. Every reasonable economic system includes the possibility of providing capital and a participation in the value created with it in the form of an interest. If money creation and economic growth go hand in hand, this enables a stable growth path. With commodity-based money, this is automatically the case, since it is co-created as part of the economic output. One origin of the word "interest" comes from the Old English word "ge-nyht" meaning "a right belonging to a calf." In medieval England, farmers often borrowed young calves for breeding purposes. The offspring of the cow were then divided between the borrower and the lender, as interest for the loan.

Trust-based symbol money can be created without limit. Issuing institutions have a natural incentive to create as much of it as possible. They themselves, as well as the actors who are favored in receiving such money, participate disproportionately in the economic output created with it. Money is naturally an instrument of control, since it allows preferential access to resources and the labor of others. The monopolization of issuance, i.e. the regulation of a state money, was therefore always in the interest of the respective rulers in a societal system. For the financing of interest politics, uncovered money was often used, which could be multiplied more easily than backed money.

In the Roman Empire, Emperor Claudius in particular successively reduced the silver content of the denarius and used it to finance military campaigns and other expenditures. The gradual devaluation of the currency, also by later emperors, then led to inflation and economic instability. In non-based coinage systems, it was also common to mint new coins every few years and to "revoke" the old ones, i.e. to declare them invalid. This was done to prevent anyone from becoming too rich and thus a threat the system.

If a discrepancy arises between the financial economy and the real economy, in which a large amount of money is compared with a limited amount of goods and services, the price of these goods and services rises and the money loses value. This inflation then leads to a loss of purchasing power for non-preferred actors and a redistribution of their resources to the preferred actors.

Historically, experiments with the creation of large amounts of symbolic money are always accompanied by inflation and economic and social instability. They are a major cause of the fall of civilizations, empires, city-states, and nations, excluding natural disasters.

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What happened in 1971 – from gold to symbol money

European countries switched to the classical gold standard starting in 1870. Currencies were pegged to a fixed amount of gold and central banks were obliged to exchange their currency for gold at a fixed rate. This guaranteed a stable and predictable exchange rate system and also ensured that countries could not manipulate their exchange rates for competitive purposes.

The standard persisted in most countries until after World War I and came under pressure during the Great Depression in the 1930s, as it limited countries' ability to pursue expansionary monetary policies. Germany, in particular, reeling from large reparations payments for World War I, began to finance these payments by printing large amounts of money. The resulting currency devaluation in the form of runaway hyperinflation and economic instability contributed to the rise of the Nazi Party and the outbreak of World War II.

Our current monetary system is based on the world order installed after World War II by the victorious powers with the Bretton Woods Agreement of 1944. The value of currencies, especially the U.S. dollar, was pegged to gold, at that time 35 dollar per ounce, and the value of other currencies to the U.S. dollar. The U.S. dollar thus became the world reserve currency for global trade.

In the 1960s, the United States financed, among other things, its Vietnam War against the communist regime in North Vietnam by printing money. The growing discrepancy between the value of the U.S. dollar and the amount of gold held by the United States led to inflation and to Europe's central banks exchanging their dollars for gold en masse. France in particular came forward with containers, which finally forced U.S. President Nixon to abolish the gold standard in 1971. Since 1971, the world's reserve currency has thus been a symbolic currency, based on confidence in the economic strength of the USA.

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Let's print unlimited Dollars

The U.S. dollar as a reserve currency gives the U.S. government great influence over the global financial system. The International Monetary Fund (IMF) and the World Bank, under U.S. control, provide far-reaching influence for economic governance of other countries. The IMF often acts as a lender of last resort for indebted nation-states. IMF loans are always tied to conditions that serve U.S. interests.

Many central banks around the world hold substantial amounts of U.S. dollars as part of their foreign exchange reserves. Only in recent decades have central banks begun to substantially diversify their currency reserves. Many oil-producing countries, such as Saudi Arabia, accept only U.S. dollars as payment for their oil exports. This means that other countries that need to buy oil have to convert their own currencies into U.S. dollars, creating a constant demand for the U.S. dollar.

The U.S. dollar has been created by the Federal Reserve (Fed) since 1913. For this purpose, the Fed buys assets, mainly U.S. Treasury bonds, on the open market from banks and financial institutions that are authorized to trade with the Fed. No physical dollars are printed as a means of payment in this process; the Fed merely creates new electronic balances in the reserve accounts of these preferred players, as central bank money. In addition to money from customer deposits, this money can be used as a reserve to create new book money. Book money is private money of banks that exists only as an accounting record and is used, for example, for lending to customers. As counterparties, the banks guarantee the value of book money until they deliver cash in exchange. In the case of cash and central bank money, on the other hand, the central bank guarantees the value.

From 1914 to 1971, the amount of U.S. dollars in circulation increased from about 7.5 billion to about 50 billion. Since 1971 until today, the amount of US dollars in circulation has increased to about 2.3 trillion. That is a number with 12 zeros. The amount of money available in the market, that is, including currency, checking deposits, savings deposits, and some other types of deposits, increased from 10 billion to 600 billion from 1914 to 1971, and from then to today to about 19.6 trillion.

Since 1971, it can be statistically observed how the money medium has decoupled from the economic base, i.e. how a gap has developed between the financial economy and the real economy. In particular, the expansion of the money supply is reflected in the purchasing power of the U.S. dollar relative to the productivity growth of the economy. Until 1971, the average U.S. citizen participated in productivity growth because his or her wage grew with it. Since 1971, wages are still growing, but the loss of purchasing power due to the expansion of the money supply is not compensated. Due to "asset inflation", real economic goods such as real estate or stocks cost much more today than in the past, when adjusted for purchasing power.

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Source: Economic Policy Institute

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With the detachment from the real economy, the financial world can also create a range of products that almost no longer need to have a real physical basis, such as credit default swaps (CDS) and other derivative constructs that were a major cause of the 2008 financial crisis. The outstanding notional value of all OTC derivative contracts was 680 trillion before 2008, and is back to about 640 trillion U.S. dollar today. Also interesting in this context is the fact that there is more gold in circulation today in the form of financial products than was mined physically.

In the course of the financial crisis of 2008, both the Fed and the European Central Bank engaged in a grand expansion of the money supply in the form of "quantitative easing" in order to stabilize the economy and, above all, the financial system. Famously, then ECB chief Mario Draghi said "Whatever it takes". Letting the system collapse was and is not an option. Much of the fresh money flowed into the stock markets and from 2013 also into crypto stocks, which are correlated because they were fed by the same mechanism.

With the recent pandemic crisis, the expansion of the money supply has accelerated once again. The amount of U.S. dollars in circulation increased by 40% from 2017 to 2023. This means that approximately 0.8 trillion US dollars were created in this period alone.

The reaction of central bankers to the imminent and now acute inflation varied from "it's temporary," "it came out of nowhere," to "Russia is to blame." In the medium term, inflation is a gain for state actors, as it allows them to deleverage. The loss of purchasing power, on the other hand, is mainly borne by the non-preferred actors in the system.

Overall, the U.S. dollar has lost more than 90% of its purchasing power since 1971. The U.S. dollar has lost as much as 97% of its value against gold. The purchasing power of the euro has fallen by 77% in the just over 20 years since its introduction in 1999. After all, the Swiss franc has depreciated by only 70% against gold. It can also be said that gold has held its value while currencies have depreciated against gold due to the expansion of the money supply. Today's monetary system can be seen as extremely overdriven because the value of money today really only consists of the trust in the system. From this point of view, "In God we trust" is a good motto for a banknote.

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Source: https://www.goldavenue.com/de/blog/newsletter-edelmetall-spotlight/gold-gegen-papiergeld

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“Paper money eventually returns to it's intrinsic value, zero.”

Voltaire

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What does Bitcoin have to do with it

Bitcoin was created in 2009 as a kind of anarchic money outside the existing government money monopolies. Satoshi Nakamoto, the author of the Bitcoin whitepaper, is said to have been looking for an alternative to the excesses, bank bail-outs and instabilities of the existing system in the aftermath of the 2008 financial crisis.

Bitcoin was the first valid alternative to government-imposed money to emerge. Bitcoin offers a similar degree of flexibility, but is limited in quantity and there is no centralized counterparty to guarantee its value. Bitcoin is so successful because it comes very close to being an ideal money medium.

It has also been argued that Bitcoin is a natural money because it is based on the raw material of energy, due to the proof-of-work mechanism for its creation. In fact, Bitcoin is backed by nothing and is based on trust in the, noteworthy, decentralized community that creates Bitcoin. In this sense, Bitcoin is also a type of fiat currency created by a community "decree."

However, crypto assets have now created a non-negligible value in the marketplace. When future autonomous and AI-based systems begin to harness the power of cryptocurrency, the market value of such currencies could take on an entirely different weighting, and very likely outside the control of centralized institutions.

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CBDC and the total control

Government players have now recognized that blockchain technology also offers advantages. The next evolutionary stage of state money is therefore central bank digital currency (CBDC). More than a hundred countries around the world are working on this. Nigeria and a few smaller countries such as Jamaica and the Bahamas have already introduced digital central bank money. Development is also well advanced in China, where the pilot trial of the e-yuan, which has been running since the end of 2020, is now to be expanded. In Europe, Sweden in particular is making rapid progress with its e-krona and is currently examining how it can be used for transfers abroad. The euro zone plans to introduce the digital euro to people in the middle of the decade as a supplement to cash.

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Source: https://cbdctracker.org

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The main goal of these efforts is to reduce the amount of cash in circulation and to achieve "absolute control over money flows," as Augustin Carstens, head of the Bank for International Settlements (BIS), the central bank of central banks, stated back in 2021.

Central bank digital currency sounds like a cryptocurrency, but in reality it has little to do with it. It is issued on a centrally managed, mostly government-controlled blockchain. A digital ID is required for use, which is conveniently integrated in the state digital wallet. This not only makes monetary transactions traceable, it also makes them technologically controllable. This applies to the free convertibility into other currencies or cryptocurrencies, the free exchangeability for goods and services, the intrinsic value of the money medium itself, as well as the power of disposal over the money in the sense of private property.

A banknote guarantees free availability and usability as a monetary medium, even if its value has come under pressure due to inflation. Central bank digital currency, like the book money of the banks, is only a claim on a banknote of corresponding denomination. The banknote is only a symbol of value against goods and services. Our current money medium is only our faith in the state collective that creates this money.

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“Central Bank Digital Currencies will ransom our future.”

Edward Snowden

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BRICS+ and SCO plan the future

The value of the currencies of the Western community is today based mainly on trust in the value of the U.S. dollar. The current conflict situation between the collective West and Russia can also be seen as a conflict for future monetary and economic dominance.

The BRICS+ countries, together with the countries of the Shanghai Cooperation Organization (SCO), account for over 60% of the world's population and about 65% of its natural resources. Both organizations have intensified their cooperation in recent months and have taken on or associated new members. Among them are Argentina, Iran, Saudi Arabia, Egypt, and Turkey. Interestingly, some of these countries have attracted attention for massive gold purchases by their central banks in 2022. BRICS+ and SCO say they are working on a "multipolar collaborative world of friendly states," alternatives to the World Bank and IMF, and a new reserve currency issued digitally on the blockchain, backed by gold.

If such an alternative to the U.S. dollar becomes established in global trade, and if Saudi Arabia in particular decides to no longer trade oil in U.S. dollars, the West will face a major monetary reset. The uncontrollably grown symbol money mountains could well cause the system to collapse and lead to a massive devaluation of the U.S. dollar.

It's a good idea to start thinking about possible alternatives. Bitcoin is only almost an ideal money. A gold-backed crypto asset on the blockchain, on the other hand, is the ideal money – valuable, independent, directly transferable.

Carole Hofmann is a Co-Founder of Swissgold Crypto AG. The startup issues gold-backed NFT (Non-Fungible Tokens) on the Ethereum Blockchain.