THE DEBAUCHERY OF CURRENCY - A Bloody History of Money

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THE DEBAUCHERY

OF CURRENCY

THE DEBAUCHERY

OF CURRENCY 2nd Edition

TIMOTHY F . PETERSON, CFA, CAIA

Published by Freedom Fortune Press ISBN: 979-8-218-21555-2 © 2023 RStat, LLC All rights reserved. No part of this publication may be reproduced in any material form, whether by photocopying, electronic, or mechanical means, or by any other means, without the prior written permission of the copyright owner, except in the case of brief quotations embodied in critical reviews and certain other noncommercial uses permitted by copyright law. For permission requests, please contact the copyright owner in writing at 9550 Spring Green Blvd, Ste 408-114, Katy, Texas 77494.

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THE DEBAUCHERY OF CURRENCY

CONTENTS CHAPTER 1 A BLOODY HISTORY OF MONEY THE DEBAUCHERY OF CURRENCY ........................................................................ 1 War and Money ................................................................................................ 2 A HISTORY OF MONEY ........................................................................................ 5 Bitcoin Money................................................................................................... 5 A Bloody History of Money ............................................................................... 5 CHAPTER 2 GOOD MONEY:

A MILDLY BLOODY HISTORY

BRANDED WITH A “T” ......................................................................................... 7 Cattle ................................................................................................................ 8 Feathers ............................................................................................................ 8 Shells................................................................................................................. 9 Whale Teeth ..................................................................................................... 9 Stones ............................................................................................................. 10 Cheese ............................................................................................................ 11 THE INVENTION OF MONEY .............................................................................. 11 Barter’s Big Problems ..................................................................................... 12 Barley Instead of Barter.................................................................................. 13 Coinage........................................................................................................... 13 Spade Money .......................................................................................... 14 Lydia and Standardization ....................................................................... 15 GOOD MONEY .................................................................................................. 16 Fungibility ....................................................................................................... 18 THE ROMAN CURRENCY DEBASEMENT ............................................................. 19 The Real Gladiator .......................................................................................... 20 THE BEGINNING OF THE END OF AN EMPIRE..................................................... 21 CHAPTER 3 GOLD GOLD IS MONEY ................................................................................................ 23 THE FIVE PROPERTIES OF GOOD MONEY........................................................... 24 Durable ........................................................................................................... 24

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CONTENTS Store of Value Does Not Mean Stable Price ............................................ 25 Divisible .......................................................................................................... 26 Portable .......................................................................................................... 26 Scarce ............................................................................................................. 26 Not Easily Obtained................................................................................. 27 Useful in its Own Right ............................................................................ 27 Counterfeit Resistant .............................................................................. 27 Requires an Economic Choice ................................................................. 28 Accepted ......................................................................................................... 29 WHY GOLD IS MONEY ....................................................................................... 30 Gold’s Price Behavior ...................................................................................... 32 Price Manipulation in the Precious Metals Markets ............................... 32 THE THREE FUNCTIONS OF MONEY ................................................................... 33 Medium of Exchange ...................................................................................... 33 Unit of Account ............................................................................................... 33 Store of Value ................................................................................................. 34 THE GOLD STANDARD ....................................................................................... 34 THE BEGINNING OF THE END OF AN ERA .......................................................... 35 CHAPTER 4 BAD MONEY:

A BLOODIER HISTORY

MONEY: THE CAUSE OF REVOLUTIONS, PART 1 ................................................ 37 CREDIT .............................................................................................................. 38 The Tally Stick ................................................................................................. 39 PAPER MONEY .................................................................................................. 40 The Adventures of Marco Polo ....................................................................... 40 Counterfeiters Will Be Decapitated ........................................................ 42 Money Backed by Nothing ............................................................................. 44 Bank Notes ..................................................................................................... 45 CLASSIFICATIONS OF MONEY ............................................................................ 46 Commodity Money ......................................................................................... 46 Representative Money.................................................................................... 46 Ledger Money ................................................................................................. 46 Fiat Currency ........................................................................................... 47 Fiduciary Currency .................................................................................. 47 GRESHAM’S LAW .............................................................................................. 47 This Tremendous Disaster .............................................................................. 47 All Your Fine Gold Was Conveyed Out of Your Realm..................................... 48

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THE DEBAUCHERY OF CURRENCY Bad Money Drives Out Good .................................................................. 49 Emperor Slit-Nose and The Twenty Years’ Anarchy........................................ 49 MONEY: THE CAUSE OF REVOLUTIONS, PART 2 ................................................ 52 THE BEGINNING OF THE END OF AN EMPIRE, AGAIN ........................................ 54 CHAPTER 5 THE DOLLAR THE POTATO KING ............................................................................................ 55 Count Schlick, Father of the Dollar ................................................................. 56 Thier’s Law: A Variation of Gresham’s Law ................................................... 57 Good Money Drives Out Bad .................................................................. 57 Artificial Scarcity ............................................................................................. 58 AMERICA: THE LAND OF FINANCIAL PANICS ..................................................... 59 The Crime of ‘73 ............................................................................................. 59 Free Silver ....................................................................................................... 61 The Two Clevelands ........................................................................................ 62 The Panic of 1907 ........................................................................................... 62 The Federal Reserve........................................................................................ 64 HOW THE DOLLAR REPLACED GOLD .................................................................. 65 Hyperinflation ................................................................................................. 65 Bretton Woods ............................................................................................... 68 The US Leaves the Gold Standard ................................................................... 69 WTF Happened in 1971? ................................................................................ 70 Petrodollars .................................................................................................... 71 WHY THE DOLLAR HAS VALUE........................................................................... 72 Seigniorage ..................................................................................................... 74 Colonial Currency .................................................................................... 75 The Seigniorage of Network Effects and the US Dollar .................................. 76 THE BEGINNING OF THE END OF AN ERA, AGAIN .............................................. 77 CHAPTER 6 LEDGER MONEY AND THE DEATH OF

THE SAMURAI A MATTER OF TRUST ......................................................................................... 79 The Kabunakama System ............................................................................... 81 SWIFT, the Modern Kabunakama ........................................................... 83 The Last Samurai ............................................................................................ 84

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CONTENTS HOW MONEY IS CREATED ................................................................................. 85 Debt ................................................................................................................ 85 Credit .............................................................................................................. 85 Ledger Money ................................................................................................. 85 THE MODERN MONEY SYSTEM ......................................................................... 86 Monetary System Integrity ............................................................................. 86 Money-like Cash Equivalents .......................................................................... 86 Fractional Reserve Banking ............................................................................ 87 Central Banks.................................................................................................. 88 Monetary Policy Tools .................................................................................... 89 The Causes of Inflation ................................................................................... 90 THE END OF AN ERA, YET AGAIN ....................................................................... 91 CHAPTER 7 BITCOIN ELECTRONIC CASH ............................................................................................. 93 BLOCKCHAIN ..................................................................................................... 94 Counterfeit Resistance .................................................................................... 95 Maintenance of Purchasing Power................................................................. 95 HOW BITCOIN ARE CREATED ............................................................................. 96 BLOODY HARD .................................................................................................. 96 Digital Token Money ...................................................................................... 97 Digital Gold ..................................................................................................... 98 Financial Payments Network .......................................................................... 98 Virtual Safe Deposit Box ................................................................................. 99 Virtual Real Estate ........................................................................................ 100 Telecommunications Network ...................................................................... 100 WHY BITCOIN HAS VALUE ............................................................................... 100 No Such Thing as Bad Publicity ..................................................................... 100 The Network Effect in Bitcoin ....................................................................... 101 Metcalfe’s Law ............................................................................................. 103 FUDBUSTING ................................................................................................... 104 Bitcoin is Anonymous ................................................................................... 105 Bitcoin is Primarily Used for Illegal Activities ............................................... 105 Bitcoin is a Bubble ........................................................................................ 105 Manipulation......................................................................................... 105 Supply Inelasticity ................................................................................. 105 Bitcoin is Bad for the Environment ............................................................... 106

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THE DEBAUCHERY OF CURRENCY Context .................................................................................................. 106 Energy Sources ...................................................................................... 106 Bitcoin is a Ponzi Scheme.............................................................................. 107 How a Ponzi Scheme Works .................................................................. 107 How Bitcoin Works ................................................................................ 107 THE BEGINNING OF AN ERA ............................................................................ 107 CHAPTER 8 EPILOGUE:

THE CURRENCY WARS

THE TENETS OF MONEY................................................................................... 110 Good Money ................................................................................................. 110 Acceptance ................................................................................................... 110 Work ............................................................................................................. 111 Congruence................................................................................................... 111 Natural Self-Interest ..................................................................................... 112 Inflation Creates Wealth Disparity ............................................................... 112 Cycles of Debt Beget Violence ...................................................................... 113 INFORMATION WARFARE: THE NEXT FRONTIER OF CURRENCY DEBASEMENT 113 Burning Down the Banks .............................................................................. 114 A Different Form of Money? ......................................................................... 116 DEBT: THE DEBAUCHERY OF CURRENCY .......................................................... 117 BITCOIN: THE CURRENCY OF CRISIS ................................................................. 120 Suppression of Bitcoin Adoption ................................................................... 121 WHAT WE DO IN LIFE ...................................................................................... 122 APPENDIX A MONETAE CUDENDAE RATIO HOW TO MINT COINS ..................................................................................... 123 ON THE COMPARISON OF SILVER TO GOLD ..................................................... 126 EPILOGUE ON THE REVALUATION OF CURRENCY ........................................... 128

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CONTENTS ABOUT THE AUTHOR Timothy Peterson is the founder of Cane Island Alternative Advisors. With 30 years in institutional investment management, he is a published author with expertise in alternative assets, including cryptocurrency investment and valuation.

Timothy authored the very popular “Metcalfe’s Law as a Model for Bitcoin’s Value,” which was the first peer-reviewed publication on how to value Bitcoin with Metcalfe’s Law. Based on downloads, his cryptocurrency research ranks in the top 0.05% of over 800,000 authors on SSRN. He has also written a book “Performance Measurement for Alternative Investments” (Risk Books: 2015) and has spoken at conferences around the world on various investment topics.

He is a dual graduate of the University of Colorado with a Master of Science Degree in Finance and a Bachelor of Arts degree in Economics. He is a Chartered Financial Analyst and Chartered Alternative Investment Analyst and has also completed the Harvard JFK School of Government course on Investment Decisions and Behavioral Finance.

Timothy teaches “Digital Assets for Bankers” at the prestigious Graduate School of Banking at Louisiana State University.

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A BLOODY HISTORY OF MONEY

CHAPTER 1

A BLOODY HISTORY OF MONEY The best way to destroy the capitalist system is to debauch the currency.

— John Maynard Keynes, “The Economic Consequences of the Peace”

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Throughout this book you’ll see side notes like this one. These notes contain key concepts and other juicy bits of information.

ost of what you know, or think you know, about money and the economy can be attributed to British economist John Maynard Keynes. Keynesian economics has been influential in shaping government economic policy in many countries since the 1930s. The basic principles include the use of fiscal policy, such as government spending and taxation, to manage economic demand and stabilize the economy, and the use of monetary policy, such as setting interest rates, to manage inflation and economic growth.

One frequently quoted passage from Keynes is that, “the best way to destroy the capitalist system [is] to debauch the currency.” The phrase was dubiously attributed to Vladimir Lenin by Keynes, perhaps because he agreed with the sentiment or perhaps because he hated Lenin.

Regardless of who said it, they were not necessarily wrong.

THE DEBAUCHERY OF CURRENCY Keynes was referring to debauchment, not debauchery. By the end of this book, you will probably reach the conclusion that the word choice is a distinction without a difference.

Debauchery typically refers to excessive and often immoral indulgence in sensual pleasures or self-destructive behavior, such as excessive drinking, drug use, promiscuity, or other activities that are considered socially unacceptable or damaging to one’s health or well-being.

However, debauchery can also refer to the corruption or degradation of something, such as a moral or cultural value, political system, or institution, often as a result of excessive indulgence or moral decay.

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THE DEBAUCHERY OF CURRENCY In this sense, debauchery is often associated with the decline of civilizations or societies.

Dictionary.com lists two simple definitions. (1) excessive indulgence in sensual pleasures; intemperance; and (2) Archaic. seduction from duty, allegiance, or virtue. This is primarily a history book, so the archaic definition seems to fit well: those trusted with authority over money have consistently breached their duty to the public they serve. The other reason for the title is the literary license of alliteration. If you read the title on the cover and thought the book had something to do with sex, well, you shouldn’t judge a book by its cover.

War and Money The historical context of Keynes’ quote was World War I, and specifically the Treaty of Versailles where Keynes was attending as a representative of the British Treasury. Keynes was critical of the harsh reparations imposed on Germany by the treaty, which he believed would cause economic and political instability in Europe, and he resigned from the delegation in protest. His famous book, “The Economic Consequences of the Peace,” published in 1919, was a scathing critique of the treaty and its potential to harm Europe’s economic recovery.

During times of war, governments often financed their operations through a combination of methods including taxation, borrowing, inflation, gifts, and plunder. To fund World War I, many countries implemented exchange controls that restricted residents from acquiring or spending foreign currency or precious metals. This allowed central banks to abandon the gold standard and monetize government debt.

Central banks provided money to governments by granting credit through book-entry transfers or paper money, which were used to pay soldiers and government employees or purchase goods from the private sector. Inevitably, all major belligerents in World War I created some level of inflation, though the typical level of inflation could be characterized as “outrageously high.”

Inflation was how the debts of the war were paid. Inflation is more subtle than taxation and borrowing, and therefore easier to hide.

Further, independent central banks permitted inflation to be implemented without the painful, public process of seeking approval from the legislature to borrow and tax more.

Following the end of the war, several countries experienced revolutions that were partially triggered by the conduct of the governments during the war. Both the old governments attempting to maintain their power and new revolutionaries seeking to seize power found that inflation was the most efficient means of financing their spending needs, whether intentionally or as a side effect.

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Was Keynes right? Chapter 5 provides more detail.

A BLOODY HISTORY OF MONEY

A typical scene from World War I.

In Keynes’ words: “By a continuing 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. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers’, who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

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THE DEBAUCHERY OF CURRENCY “... There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and it does it in a manner which not one man in a million is able to diagnose.”

The impact of currency debasement on an economy can be understood in several key aspects: Inflation and Economic Instability: Currency debasement almost always leads to inflationary pressures in an economy. As the value of the currency diminishes due to the reduction in metal content or quality, the prices of goods and services tend to rise. This can erode people’s purchasing power and create economic instability as individuals and businesses struggle to adapt to rapidly changing prices.

Loss of Trust and Confidence: Currency debasement undermines trust and confidence in the monetary system. When money loses value or reliability as a medium of exchange and store of wealth, people will seek alternative means of preserving and transacting wealth, such as bartering or hoarding goods. This loss of trust can have long-term negative effects on economic activities, trade, and investment.

Wealth Redistribution: Currency debasement results in wealth redistribution within society, from the poor to the rich. Those who hold large amounts of the debased currency, such as the government or powerful individuals, may benefit from the ability to repay debts or finance expenditures more easily. However, individuals with fixed incomes or savings in the devalued currency suffer as their purchasing power diminishes. This leads to increased income inequality and eventually social unrest.

Trade and External Relations: Currency debasement can affect a nation’s ability to engage in international trade and maintain stable economic relations. If the debased currency loses its acceptability or is not recognized at its face value by trading partners, it can hinder the flow of goods and services across borders. This can harm exports, strain diplomatic ties, and impede economic growth.

Rise of Alternative Currencies: In response to currency debasement, alternative forms of exchange and currencies emerge. Private or regional currencies, barter systems, or the use of foreign coins with higher intrinsic value can become more prevalent as people seek more stable means of conducting transactions. These alternative currencies can further complicate the monetary landscape and add to economic uncertainty.

Throughout the remainder of this book, you will see these recurring themes.

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A BLOODY HISTORY OF MONEY

A HISTORY OF MONEY People see money everywhere, all the time. People spend money, sometimes without thought. There never seems to be enough money; everyone wants more. A few people seem to have more than enough money.

Why do some people have money and others don’t?

Why is it that money looks different from country to country?

What is the difference between a paper dollar and a silver dollar?

Or a gold dollar? Or a bar of gold?

If the government can print money, why don’t they just print enough for everyone?

For the Allied victors of World War I and World War II, the creation and nature of money wasn’t given much thought. The average person didn’t know the answers to these questions because the answers themselves were trivial. The economy of the West was a horn of plenty, with seemingly automatic economic growth spawned from a myriad of available capital types and abundant natural resources. Money was something your employer gave you, sat idle in a bank vault, transited in a wallet, and then was spent on something you needed or wanted. For nearly a century, the average person–from high school student to corporate CEO–understood money with the depth and concern of an eight-yearold.

Bitcoin Money While these questions have been around for millennia, a resurgent interest in the definition and nature of money has arisen with the success of Bitcoin. Bitcoin’s creation has forced many people to ask the question, “What makes something money?” In a way that traditional educational institutions could never imagine, there has been a flood of information made available on the topic.

This book will not spend a lot of time on Bitcoin. It is, however, the first part in a multi-part series on Bitcoin. Before anyone can understand digital money, they must understand what money is, why money is useful, and how money is created. In a sense, this book is the prequel to a future book about Bitcoin money.

A Bloody History of Money Regarding bad monetary policy, Keynes poignantly observed that “the process engages all the hidden forces of economic law on the side of destruction.” That is not hyperbole. The history of money is the history of war, bloodshed, revolt, and strife. The two are inseparable.

While it was not the original intention of this book to highlight the violent history associated with money, it was inescapable. Each causes the

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THE DEBAUCHERY OF CURRENCY other to come into being, evolve, bloom, then collapse in a heap of ash and blood.

This book is one humble attempt to break that cycle.

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GOOD MONEY: A MILDLY BLOODY HISTORY CHAPTER 2

GOOD MONEY: A MILDLY BLOODY HISTORY Our history now descends from a kingdom of gold to one of iron and rust.

—Cassius Dio, Roman History

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uled by a cruel and unstable man, the empire was beginning to crumble. Soon after he assumed power, the emperor’s sister conspired with several politicians to have him killed. The plot failed; the traitors were all executed. Now in his twelfth year on the throne, the emperor was regarded as an evil megalomaniac, reveling in games and drink and destroying any possible threat with ferocity. Marcia, the emperor’s mistress, stumbled upon a hit list, dismayed but not entirely surprised to find her name on it. Soon after, at a New Year’s Eve party, she slipped poison into his wine, but it wasn’t enough. Sick and weak, the emperor retreated to his bath, where he was met by a very strong man with a familiar face.

BRANDED WITH A “T” What do cattle and cheese and barley have in common? They have all been used as a form of currency in different parts of the world at some point in history. Before there was cryptocurrency on your computer, and before there were coins and bills in your wallet, money was virtually indistinguishable from common items found on the dinner table. And as odd as that may sound, consider that in hundreds of years, people will probably look at gold coins, dollars, and even Bitcoin as equally odd and even laughable forms of money.

Before the invention of coinage, currency was a social convention subject to local custom, tradition, and whatever natural resources happened to be in the area. Trade was just that—swapping items for other goods, services, or perhaps even relationships. These micromoney networks operated in isolation, and often without formal written rules or standardization of any kind.

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THE DEBAUCHERY OF CURRENCY Money is born of necessity. Throughout history, people have used what was around them to solve the problem of the moment. The invention of money, considering its usefulness throughout history and in all parts of the world, is comparable to that of the discovery of fire and the invention of the wheel. And yet it is among the least understood inventions in existence.

People intuitively accept that money has value, but many things that have value are not money. What is the difference? Why do societies not trade in diamonds? Why not just print fake money as with the famous Monopoly game?

Part of the mystery can be explained by simply understanding what makes some things suitable to serve as money and why other things cannot serve as money. Money has distinct properties, and it took 3,000 years to figure out what those properties are.

Cattle Cattle have been used as a form of currency for thousands of years, dating back to ancient civilizations such as the Sumerians and Babylonians. Cattle were also used as currency in the rural areas of ancient Roman and Viking societies. The Maasai people of East Africa used cattle as a form of currency for centuries.

Cattle were used as a form of currency due to their practicality and usefulness. Cattle could be used for farming, transportation, and food. Hence the use of cattle as currency was particularly prevalent in societies that were based on agriculture and pastoralism.

As a valuable yet portable commodity, cattle were used as a means of exchange for goods and services. The value of cattle as money was based on their weight and size, with larger and more robust cattle being considered more valuable.

So valuable were cattle that the theft of one animal meant a death sentence, a practice that dates back to the Code of Hammurabi in ancient Babylon (1750 BC). By 1850 AD in the American West, punishment for cattle theft had evolved into something nicer: branding the letter “T” on the thief’s forehead. Today cattle theft is still a serious crime with penalties ranging from 10-14 years of imprisonment and fines in the hundreds of thousands of dollars.

Feathers Feathers were first used as a form of currency by Native American tribes in North America. The use of feathers as currency was closely tied to the culture and beliefs of these tribes. Feathers were considered sacred and were used in religious ceremonies and as symbols of power and status. The use of feathers as currency, therefore, reflected the importance of these items in the culture and beliefs of the people who used them.

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GOOD MONEY: A MILDLY BLOODY HISTORY In South America, the Inca Empire used small, colorful feathers as a means of exchange for goods and services, with larger and more ornate feathers being valued more highly. Feathers were also used as tribute payments to the Inca rulers.

In Africa, the Bantu used the feathers of the blue crane as a means of exchange for goods and services. These feathers were also used as a symbol of wealth and status, with larger and more ornate feathers being valued more highly.

Feathers are still sacred and valuable in modern society. In the United States, it is currently illegal under federal law to possess the feather of a Bald or Golden eagle. Exceptions are granted for Native American tribes who use eagle feathers in their religious ceremonies.

Shells Shells were first used as a form of currency by the ancient Chinese. The cowrie shell, which was small and easily transportable, was used as a means of exchange in China as early as 1200 BCE. The cowrie shell was also used in other parts of Asia, including India and Persia, and was eventually adopted by African traders as a form of currency.

In Africa, cowrie shells became one of the most widely used forms of currency. The shells were used as a means of exchange for goods and services, as well as for tribute payments to rulers. Cowrie shells were also used as a symbol of wealth and status, with larger and more ornate shells being valued more highly.

The Wampum belt, made from white and purple shell beads, was used by the Iroquois Confederacy as a symbol of unity and as a means of exchange.

Certain shells, such as the Cypraea moneta or money cowrie, were considered particularly valuable and were used as a means of exchange in many cultures. The use of shells as money was also influenced by religious and cultural beliefs. In some cultures, shells were considered sacred and were used in religious ceremonies.

Whale Teeth Whale teeth were one of the earliest forms of currency used in various cultures around the world. Their teeth have long been considered valuable for their strength and durability, making them a valuable commodity for trade. The teeth were highly prized and were used as a medium of exchange for trade, marriage settlements, and other transactions. The size and quality of the tooth determined its value, with larger teeth being worth more. The teeth were also used to make tools, weapons, intricate carvings, and jewelry, which further increased their value.

The Maori of New Zealand used whale teeth, known as reiwai or rei puta, as a form of currency for centuries. Similarly, the Fijians also used whale teeth, known as tabua, as a form of currency. The value of the tabua 9

THE DEBAUCHERY OF CURRENCY was determined by its size, quality, and number of perforations. The more perforations a tabua had, the more valuable it was. The tabua was also used as a form of tribute to the chiefs. The Inuit of Canada and Greenland also used whale teeth, known as Qilaut, as a form of currency.

Larger and more symmetrical teeth were worth more.

Consider the difficulty in obtaining the tooth of a whale without modern aides. Even with a good canoe, some sharp spears, and several good friends, whale hunting would have required advanced seafaring technology and skill, as well as the ability to navigate and survive on the open ocean. To seek a tooth from a live whale meant risking death. Once a whale was captured, its teeth would be extracted using primitive tools such as knives, chisels, or hammers. This required a significant amount of effort and time, as whale teeth are extremely hard and durable.

Whale teeth were rare because they were difficult to obtain, which made them highly valuable. However, they suffered as a form of currency as they were not easily divisible, making them impractical for small transactions. Consequently, the use of whale teeth as currency declined with the advent of modern currency and the decline in whale populations due to hunting.

Stones Yap stones were used by the people of Yap, an island in the western Pacific Ocean. Yap stones are large, circular disks made of limestone, with a hole in the center. The stones range in size from a few inches to over twelve feet in diameter, with the largest stones weighing several tons.

The stones used as money were not just rocks lying around the island of Yap. These particular stones were quarried on the island of Palau, which was over 250 miles away, and transported to Yap on rafts and canoes. As with whale teeth, the difficulty in obtaining such a stone meant considerable risk and effort. The foreign stones were then used as a medium of exchange for goods and services, such as land, livestock, and marriage settlements.

The Yap stones were unique as they did not need to be physically moved to facilitate transactions. The ownership of the stone was transferred from one person to another through an oral agreement, with the stone remaining in its original location. The stones were also used as a form of status and were often displayed in public places.

The value of the Yap stones was determined by various factors, such as the size, quality, and history of the stone. The larger and more intricately carved stones were worth more than the smaller ones, and the history of the stone also played a role in determining its value. If a stone had a significant historical or cultural significance, it would be worth more than an ordinary stone.

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GOOD MONEY: A MILDLY BLOODY HISTORY The Yapese still use the stones as a form of ceremonial currency and continue to maintain the tradition of using them.

Cheese Parmesan cheese wheels, also known as Parmigiano-Reggiano, are a type of hard cheese that is commonly used in Italian cuisine. In addition to being a popular food item, Parmesan cheese wheels have also been used as a form of currency throughout history.

In the Middle Ages, Parmesan cheese wheels were used as a form of payment by landowners to their workers. At the time, this cheese was considered to be a luxury item and was highly valued. To ensure that their workers were properly compensated, landowners would give them a certain number of cheese wheels as payment for their labor. The cheese wheels could then be sold or traded for other goods and services.

During the 19th century, Parmesan cheese wheels were also used as a form of collateral for loans. At the time, banks in Italy would accept the cheese wheels as collateral for loans to farmers and cheese makers. The cheese was highly valued and had a long shelf life, making it an ideal form of collateral for loans.

Today, Parmesan cheese wheels are still used as a form of currency in some parts of Italy. In the town of Bibbiano, located in the Emilia-Romagna region of Italy, a local bank accepts Parmesan cheese wheels as collateral for loans. The cheese wheels must meet certain quality standards and be stored in a secure location to be accepted as collateral.

THE INVENTION OF MONEY Mesopotamia, located in the Middle East and covering modernday Iraq, is considered one of the earliest cradles of civilization. This region, also known as the Fertile Crescent, is bordered by the Tigris and Euphrates rivers and was home to many ancient civilizations, including the Sumerians, Akkadians, Babylonians, and Assyrians.

In 3000 B.C., Mesopotamia had abundant natural resources, such as wood, water, and fertile soil. The Mesopotamians became skilled artisans, metalworkers, and farmers, which enabled them to produce a wide range of goods and their economy flourished. With this wealth came education, and the Mesopotamians developed one of the earliest known writing systems.

Cuneiform was a series of wedge-shaped marks impressed into clay tablets. The invention of writing made it possible for merchants to record their transactions, making it easier for them to keep track of their sales and inventories, as well as tax collection. The invention of writing also made it easier for traders to communicate with each other, which led to an increase in trade and commerce.

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THE DEBAUCHERY OF CURRENCY Mesopotamia lies at the crossroads of three continents: Europe, Asia, and Africa. The region’s proximity to these three continents made it an ideal place for traders to gather and exchange goods. This strategic location also made it possible for Mesopotamia to become a hub of international trade.

Cuneiform writing enabled the use of a reliable transaction ledger. From the combination of ledgers, location, and resources grew an extensive network of trade routes. As a result, Mesopotamia became a central market for trade in goods such as copper, tin, textiles, spices, and precious stones.

The ancient Mesopotamians used a system of weights and measures to exchange goods. They used various commodities such as barley, wool, and metals such as silver and gold as units of exchange.

These commodities were weighed and measured to determine their value. This system of exchange is known as the barter system. As trade increased, the barter system became impractical. The ancient Mesopotamians needed a more efficient way to exchange goods.

Ancient Mesopotamia benefited from a fortunate mix of geography, economy, and communication. These three ingredients, which came together at just the right time, in just the right way, allows Mesopotamia a distinction in history: the birthplace of money.

Barter’s Big Problems Barter is a system of exchange where goods and services are traded directly without the use of money. In a barter system, people trade one good or service for another. For example, a farmer might trade wheat for cloth, or a carpenter might trade a chair for a basket of fruit.

Barter was the earliest form of trade, but it has several problems that make it impractical in modern times.

One of the main problems with barter is that it requires a coincidence of wants. For a trade to occur, both parties have to want what the other person has to offer. If the farmer has wheat to trade, but the carpenter doesn’t need wheat, then no trade can occur. This problem is particularly acute in a large economy with many goods and services. In such an economy, it is unlikely that two people will have exactly what the other person wants. As a result, barter tends to limit the range of goods and services that can be traded.

Barter is inefficient. This inefficiency is manifested in the form of considerable time and effort spent trying to find others who have what is needed. Markets and money solve this problem.

Barter makes it difficult to measure the value of goods and services. There is no common unit of account, which means that it is difficult to compare the value of two different goods or services. For example, it is difficult to say how many baskets of fruit are worth one chair.

This problem leads to disputes.

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GOOD MONEY: A MILDLY BLOODY HISTORY Barter makes it difficult to store value. Because goods and services are traded directly, they cannot be easily stored for later use. This can be a problem for people who want to save for the future or for businesses that need to store inventory. In a monetary system, on the other hand, money serves as a store of value, which makes it much easier to save and invest.

Finally, barter tends to be a localized system of exchange. In a barter system, people tend to trade with others who are geographically close to them. This is because it is difficult to transport goods and services over long distances without incurring significant costs. As a result, barter tends to limit the scope of trade to a relatively small area.

Barley Instead of Barter

Notice how the unit of weight became the name of the coin. Currency denominations are not necessarily arbitrary.

The first form of money used in Mesopotamia was barley. Barley was used as a medium of exchange, a unit of account, and a store of value.

Barley was chosen as the primary form of money because it was abundant and easily divisible. It was also a staple food in Mesopotamia, making it a valuable commodity. The value of barley was based on its weight, and standardized units of weight were used to measure it. These units of weight were called shekels, and they became the standard unit of measure for money in Mesopotamia.

While barley could store value for a while, it would not last for a long while. Grains are susceptible to the elements, not to mention thieving mice, and so barley worked as a short-term money solution, but not a long-term one.

Coinage The first coins were developed in 2500 BC. These coins were small, flat, and made of clay. They were called bullae and were used to keep track of transactions. Each bulla was marked with the amount of barley it represented and the names of the parties involved in the transaction. Bullae are one of the earliest forms of token money: a representation of another item of value.

Bullae were sealed with a piece of string or clay. This crude form of tamper-proofing ensured that the bulla could not be opened or altered without detection.

As trade continued to grow in Mesopotamia, the use of bullae became increasingly common. They were used for transactions ranging from the purchase of everyday goods to the payment of taxes. The use of bullae as a form of money continued for several centuries until metal coins were introduced.

As the problems associated with barley and clay coins became evident in Mesopotamia, merchants started using metal rings and coins made of silver and gold as a medium of exchange. The first metal coins 13

THE DEBAUCHERY OF CURRENCY were introduced in Mesopotamia around 2000 BC. These coins were made of silver and were also called shekels. They were small, round, and stamped with images of gods and kings. The use of metal coins as money was an important development because they were the beginning of “good money.”

With the introduction of metal coins, the monetary system in Mesopotamia became more standardized and efficient. Coins were widely accepted as a medium of exchange, and their value was based on their weight and metal content. This led to the development of a sophisticated banking system, where people could deposit and exchange different forms of money.

Spade Money Mesopotamia was not the only culture to develop coinage. The first known coins used in China date back to around 1100 BC, during the Zhou dynasty. These coins were called spade money because they were shaped like a spade or shovel. They were made of bronze, and they had a hole in the center so that they could be strung together.

Spade money was used as a form of currency for over 400 years in ancient China. It was used in both domestic and international trade, and it was accepted throughout the Zhou dynasty’s territory, which covered most of what is now modern-day China.

The use of spade money was a significant advancement over the previous barter system that had been used in China. Spade money allowed people to trade more easily and quickly, and it helped facilitate the growth of trade and commerce in China.

The value of spade money was determined by its weight. The weight of the coins was not standardized, so it was common for merchants to use scales to weigh the coins before accepting them in exchange for goods or services. In some cases, the coins were also stamped with the name of the issuing state, which added to their credibility and made them more valuable.

During the Zhou dynasty, spade money was produced by the state and distributed to local governments and merchants for use in trade. This ensured that there was a consistent supply of currency in circulation, which helped stabilize the economy and facilitate trade.

However, spade money was not without its problems. Because the value of the coins was determined by their weight, it was common for people to shave off small amounts of metal from the coins to reduce their weight and increase their value. This practice was known as clipping, and it made it difficult for people to determine the true value of the coins they were accepting.

Clipping is a form of currency debasement. Clipping was a common practice during medieval and early modern times when coins were made of precious metals like gold and silver.

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GOOD MONEY: A MILDLY BLOODY HISTORY

To combat clipping, many governments implemented either ridges called reeding, or patterns or text called milling, to the edges of coins. This made it more difficult to clip them without being noticed.

Clipping was usually carried out by dishonest individuals who would collect the clippings from many coins and melt them down to create new coins. Or they could sell the precious metal for a profit. This practice caused the value of coins to decrease over time, leading to inflation and economic instability.

In response to this problem, the state began to standardize the weight of spade money and issue new coins with uniform weight and size. These new coins were called square foot spade money because they were still shaped like a spade but had a square shape instead of a curved shape.

They were also made with a raised edge to prevent clipping and counterfeiting.

Lydia and Standardization King Alyattes ruled the ancient kingdom of Lydia, located in modern-day western Turkey, from around 610 to 560 BC. During his reign, King Alyattes made a significant contribution to the history of money by introducing the world’s first standardized coinage system.

Lydia was a wealthy kingdom with access to abundant natural resources, including gold and silver. According to Herodotus, a Greek historian who lived in the fifth century BC, King Alyattes was the first ruler to make coins made of electrum, a natural alloy of gold and silver found in the riverbeds of Lydia. The Lydians developed a process known as minting. The metal was heated until it became molten and then poured into standardized molds to create uniform coins with a consistent size, weight, and purity. This process allowed the Lydians to create large quantities of coins quickly and efficiently. The coins were stamped with images and symbols to indicate their value and origin.

Lydian stater circa 600 BC

The introduction of standardized coinage was a significant development in the history of money, as it made transactions easier and more efficient. Before coins, people had to rely on bartering, which could be cumbersome and impractical. With coins, people could easily trade goods and services for a fixed amount of money, regardless of the specific items being exchanged. This allowed for more complex economic transactions and enabled commerce to flourish.

King Alyattes’ coins, called staters, were also distinctive in their design. One side of the coin featured a lion’s head, while the other side 15

THE DEBAUCHERY OF CURRENCY displayed a simple geometric pattern, such as a square or rectangle. The lion’s head design became a common feature of Lydian coins, and it was later adopted by the neighboring Persian Empire.

The introduction of coinage in Lydia had a significant impact on the wider world. The use of standardized coins spread quickly throughout the Mediterranean region, and by the fifth century BC, such coins were in use in most parts of the ancient world. The adoption of a standardized system of money also paved the way for the development of more sophisticated banking and financial systems.

The Lydian coinage system was not without its challenges, however. One problem was the issue of counterfeiting. As coins became more widespread, criminals began to produce fake coins, which were often made of cheaper metals and had lower levels of purity. To combat this problem, authorities began to implement measures such as marking the coins with special symbols or using a system of coinage control that regulated the production and distribution of coins.

GOOD MONEY Athena was the Greek goddess of wisdom, courage, and strategic warfare. Athena was often depicted with an owl as her companion, emphasizing her connection to wisdom and intelligence. Athena was the patron goddess of Athens, and to honor her the Athenians minted their silver coins with her likeness on one side, and an owl on the other. Silver was a preferred metal for coinage in many ancient civilizations due to its inherent value, durability, and relatively widespread availability. Silver had several advantages that made it suitable for use as a form of currency.

It was scarce enough to be valuable but not so rare that it was inaccessible. It was durable and didn’t corrode easily, ensuring that the coins would maintain their value over time. It was divisible into smaller units, allowing for practical transactions.

In circulation between 510 to 38 BC, the Athenian Tetradrachm, also known as the “Owl Tetradrachm,” is known for its relative stability and consistent silver content during that period. These consistently highquality coins quickly became the standard currency used throughout the ancient Mediterranean world. The tetradrachm is now one of the most iconic, recognizable, and sought-after coins from ancient Greece.

During the Peloponnesian Wars (431-404 BC), Athens faced significant financial challenges due to the costs of maintaining a large naval fleet, supporting its allies, and waging war against Sparta. To finance these endeavors, Athens resorted to several measures, including debasing its coinage.

Currency debasement refers to the intentional reduction of the precious metal content in coins by the issuing authority, such as a king, emperor, or government, while maintaining the same face value of the

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GOOD MONEY: A MILDLY BLOODY HISTORY coin. In the case of the Athenian owl, this would mean reducing the silver content of the coins while still representing them as tetradrachms.

This practice allowed the Athenian government to mint more coins with less silver, effectively increasing the money supply.

Athenian tetradrachm circa 480 BC.

These properties are discussed in greater detail in the next chapter.

The debasement during the Peloponnesian War was gradual and happened over several phases. Initially, the Athenian Tetradrachms contained about 17.2 grams of silver. However, as the war progressed, the silver content was reduced. By the end of the war, the weight of the coins dropped to around 15.2 grams, representing a notable debasement.

This debasement had several consequences. Firstly, it led to a decrease in the purchasing power of the coins, causing inflation within Athens and affecting trade relationships with other city-states. Additionally, the debasement eroded the confidence and trust in the Athenian coinage, impacting its acceptability in commercial transactions.

Despite the debasement during the Peloponnesian War, the Athenian Owl remained widely circulated and continued to be recognized as a valuable medium of exchange in the Greek world. It retained its reputation due to the stability of its design, the enduring association with Athens and Athena, and the recognition of the coin’s historical significance.

Aristotle, the Greek philosopher, would have been very familiar with the Athenian Owl, and its popularity and longevity led him to make an incredibly important observation. It was this type of coin that prompted him to ask, “Why does money work the way it does?”

He wrote the answer to that question in his book “Politics.” By now it was evident that people used money to exchange goods and services, and without it, trade would be difficult. But why? And why was standardized coinage so successful as money?

Aristotle pondered the properties of money, which he believed were crucial for its success. He identified four key properties of money: durability, divisibility, portability, and what he called ‘independent value’.

The latter has been interpreted to mean scarcity, which in and of itself is often misunderstood. In addition to these four properties, he also discussed the concept of fungibility.

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THE DEBAUCHERY OF CURRENCY Durability is the ability to withstand physical damage and the effects of time.

Divisibility is the ability to be separated into smaller units without a loss of value. The sum of the pieces must always equal the original whole.

Portability is the ability to be easily moved from place to place or person to person.

Scarcity in the field of economics has a particular meaning: difficult Scarcity does not to obtain.

   

Fungibility Fungibility refers to the interchangeability of money. Fungibility is the quality of sameness. The Lydian stater was one of the first coins in widespread use that was intentionally designed to be uniform. This meant that each coin was perfectly interchangeable with any other coin.

In other words, one unit of money was exactly equivalent to another unit of the same type: one dollar should be worth the same as any other dollar.

Fungibility is important because it allows for easy circulation of money. Ease of circulation gives rise to a fifth characteristic of good money: acceptance.

Each of the early forms of money exhibited at least one of Aristotle’s characteristics. And though it took nearly 3,000 years, humanity finally figured out the right formula for good money: portable, durable, divisible, scarce, and accepted. Any commodity which possesses these five attributes can be used effectively as money.

Portable

Cattle Cheese Shells Feathers Yap Stones Barley Whale Teeth Coins

Durable

Divisible

       

  



Scarce

       

Accepted

 

Coinage solved many problems associated with efficient trade and commercial finance. But it also created three new problems.

Counterfeiting became a concern. While it was impossible to counterfeit a cow or stone, making something look like a gold coin was comparatively simple.

Another problem, exchange rate differentials, became commonplace. Charging different or unscrupulous prices in the exchange of one currency for another was very lucrative. That said, the birth of the

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necessarily mean limited supply.

Something is scarce if it requires work to obtain it.

The first four key properties of money are durability, divisibility, portability, and scarcity.

Acceptance is a fifth required property. Fungibility, or sameness, fosters acceptance. Of all these properties, acceptance is the most important.

Anything which has these five properties can be used as money effectively.

Scarcity in this chart means anything which requires work to obtain. The shells and feathers used as primitive money were not the kind ordinarily lying around and were therefore difficult to find.

GOOD MONEY: A MILDLY BLOODY HISTORY

Debasement destroys the properties of scarcity and fungibility.

When money lacks sameness, or no longer represents what it is supposed to, or is easily obtained, it ceases to function as good money and becomes bad money.

United States can be traced directly to this unethical practice and its bloody consequences.

Debasement–altering the nature of the currency in a way that cheapens its value–became too tempting for bankers and kings. We should recognize debasement for what it truly is: a counterfeiting process that has been institutionalized by the issuing government. Why would they do this?

Two bookend events–currency debasement culminating in political revolution–have repeated many times throughout world history.

The recipe for failure is always the same: a nation creates a high, yet unsustainable, standard of living financed by debt. So long as the population and economy grow, this debt can be refinanced and paid for with cheaper, debased currency sometime in the future. But when that growth stops, problems set in. Unwilling to adjust the national standard of living downward, governments debase the currency even more. Inflated prices give the impression of value being maintained, but the purchasing power declines: more money buys less stuff. The fruits of inflationary debasement have always been economic turmoil, which eventually manifests in political instability and, in many cases, bloody war. The impact of debasement is clear, yet almost imperceptible in the short term. The decline into ruin often takes decades, and sometimes centuries.

THE ROMAN CURRENCY DEBASEMENT

This is an unfathomably large size, representing about 5% of the population of the entire planet! A city of comparable size today would have 400 million people and be the third largest country in the world by itself!

In 100 AD, the Roman Empire was at the height of its power and territorial extent. It spanned from modern-day Britain in the north to Egypt in the south, and from Spain in the west to the Black Sea in the east. Its territorial influence covered an area about the size of Australia.

If the Roman Empire of 2000 years ago existed today, it would be the 10th largest country in the world by population, just behind modern-day Russia.

By 200 AD, the Roman Empire was a vast territory that spanned three continents. Its sea trade routes and sprawling network of durable toll roads (The Roman Roads System) made the empire one of the wealthiest and most prosperous in history. The city of Rome itself was a bustling metropolis, with a population estimated at around one million people.

The Roman economy was based on agriculture and commerce, so much so that the god Mercury was the most popular deity. Mercury, with his winged sandals and coin purse tied to his waist, represented financial gain, commerce, communication, travelers, and boundaries.

The Roman Empire’s trade network was supported by a system of weights and measures, as well as a common currency, which made it easier for merchants to conduct business across different regions. The

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THE DEBAUCHERY OF CURRENCY empire also had a system of contracts and commercial law that helped to regulate trade and resolve disputes.

The Roman army was one of the most formidable in the world, with a well-organized hierarchy and training system. The empire’s borders were defended by legions stationed along the frontiers, and the army was also used for internal security and to enforce the emperor’s authority.

The Roman Empire was directly responsible for the structure and culture of modern western society. Roman law was one of the most important legal systems in the ancient world and has influenced the development of modern legal systems in Europe and beyond. The concept of “innocent until proven guilty” was first established in Roman law, and was the origin of many modern legal concepts, such as contracts, property rights, and civil law. The use of arches, vaults, and domes in construction was pioneered by the Romans and continues to be used in modern buildings. Latin, the language of the Roman Empire, has had a lasting impact in the areas of science, law, and medicine. Many scientific and medical terms are derived from Latin, and legal terms continue to be used in modern legal systems. The Roman Republic and later the Roman Empire were models for modern democratic and bureaucratic systems of government. The concept of a written constitution and the separation of powers between branches of government were developed in ancient Rome.

How does such an advanced, strong, and large society thoroughly eviscerate itself into absolute ruin and decay?

The Real Gladiator Rome faced economic challenges as its borders expanded and its military campaigns became more costly. The cost of maintaining the empire’s vast infrastructure, including roads, aqueducts, and public buildings, put a strain on the treasury, and high taxes caused economic hardship for many people. The Roman Empire’s military campaigns were expensive, and the government’s spending on military conquests left little resources to address other issues, such as economic and social problems at home. Rome’s borders were constantly threatened by barbarian invasions, and the military became overstretched as it tried to defend the borderlands.

To finance these expenses, the Roman authorities debased the currency.

The denarius was a silver coin that was used in the Roman Republic and Roman Empire from the 3rd century BC until the 3rd century AD. It was the most common coin in circulation during this time and was used for both daily transactions and to pay soldiers and government officials.

The denarius typically weighed between 2.5 and 3.5 grams and had a diameter of around 18 to 20 millimeters. Initially, it was made of a

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GOOD MONEY: A MILDLY BLOODY HISTORY silver alloy that contained about 95% pure silver. The coin’s obverse side featured the image of a Roman god or goddess, such as Jupiter or Minerva, while the reverse side showed a variety of designs, including images of animals, ships, or military victories.

Denarius of Commodus circa 180 AD. Commodus was so hated that upon his death the Senate had him declared a public enemy, his name was erased from public places, and statues of Commodus were demolished throughout the city.

By the time Marcus Aurelius became emperor in 161 AD, the denarius was 75% silver. His son, Commodus, became emperor upon Marcus Aurelius’ death in 180. You may recognize these names from the popular movie Gladiator. Commodus is portrayed as a cruel and unstable ruler in the movie. In real life, he was worse. Commodus’ behavior was violent and erratic. He loved the blood sport of gladiatorial games and would often participate in them himself, especially if it meant he could kill something or someone.

THE BEGINNING OF THE END OF AN EMPIRE

One of Commodus’ first acts as emperor was to debase the denarius, something he would do repeatedly to pay soldiers more to acquire their loyalty and protection. Twelve years later, laying in his bath, sick and weak and vomiting from the poison his mistress gave him, he looked up to see his trainer, a wrestler named Narcissus. His last acts as emperor were likely a gasp and an expression of shock, as Narcissus killed him with his bare hands. And that should tell you everything you need to know about the impact of currency debasement on economic and political stability.

Between 175 AD and 300 AD, the denarius was debased from 21st century Venezuela says, 2.5 grams of silver to practically zero. It is estimated that the inflation “Hold my beer.” rate reached an astronomical 15,000% between AD 200 and 300! During this time, an emperor had an 84% chance of being killed—either via warfare or assassination. The length of reign dropped from 10.3 years to 4.4 years.

Are you not entertained?

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THE DEBAUCHERY OF CURRENCY

Commodus was killed by his wrestling partner while his mistress looked on.

Pertinax, the emperor who succeeded Commodus, was assassinated after only three months by the Praetorian guard, who had received only half their promised pay. The next emperor, Didius Julianus, immediately devalued the Roman currency. Julianus was killed in the palace by a soldier on 2 June 193 AD, after a mere 66 days of ruling. The successors–Septimus Severus, Caracalla, Elagabalus, and Alexander Severus–all were killed by their own guards. A dozen more were killed in the centuries that followed. In 455 AD, Petronius Maximus was killed by a mob after ruling for only 71 days.

Currency Debasement and Roman Emperor Deaths

With no stable government and worthless money being paid to soldiers, the empire was overrun by Germanic tribes, including the Visigoths and Vandals. By 476, the Roman Empire was no more.

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GOLD CHAPTER 3

GOLD Gold is money. Everything else is credit.

—J.P. Morgan

I

t was a hot summer day when the six-horse Union Army wagon carrying gold transited through the plains. As the wagon rolled down a dusty Missouri road, the sound of hoofbeats could be heard in the distance. A gang of dusty cowboys emerged from the surrounding woods, guns blazing. Ambushed, the paymaster and his men were no match for the seasoned bandits, who had carefully planned the heist for weeks. The soldiers were caught off guard and quickly overwhelmed by the sheer force of the attack.

With the paymaster’s men lying wounded or dead on the ground, the thieves quickly rifled through the wagon, grabbing bags of gold coins and bars. They stuffed their saddlebags with as much gold as they could carry and rode off into the wilderness.

GOLD IS MONEY John Piermont Morgan was an American financier who invested heavily in infrastructure in the early 1900s. J.P. Morgan’s companies sold steel to railroads, invested in General Electric just as electricity was coming online, and sold gold to the US Government in 1895 to keep the Federal Treasury solvent. Financial firms that bear his family name include JP Morgan Chase Bank; Morgan, Harjes & Company of Paris; Morgan, Grenfell & Company of London; Morgan Guaranty Trust; and Morgan Stanley.

J.P. Morgan once said, “Gold is Money. Everything else is credit.” What prompted J.P. Morgan to differentiate between gold and credit? This concise statement profoundly captures the nature of the modern banking system. This chapter explains why the first sentence is true; a later chapter explains why the second sentence is true. These two simple sentences are critically important to the creation and use of Bitcoin.

Gold, because of its unique qualities, has been the one material that is universally accepted in exchange for goods and services for

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THE DEBAUCHERY OF CURRENCY millennia. For centuries, gold in the form of coins or bullion has played a major role as a global currency and unit of account, or pricing measure.

As a store of value, gold began to serve as backing for paper currency systems when they became widespread in the 19th century, and from the 1870s until World War I, the gold standard was the basis for the world’s currencies. Although gold’s official role in the international monetary system had come to an end by the 1970s, the metal remains a highly regarded reserve asset, and approximately 45 percent of all the world’s gold is held by governments and central banks for this purpose.

Gold is still accepted by all nations as a medium of exchange for international payment.

THE FIVE PROPERTIES OF GOOD MONEY Good money must meet certain criteria. Let’s examine those characteristics again in detail.

Durable Durability means unchanging. Eggs crack. Wood rots. Iron rusts and ice melts. Even stone, over time, wears down and loses a little bit of its mass, and some stones are easily broken. Durable money must be able to sit on a shelf for a long time and not change. It also must be able to be handed back and forth thousands of times, and carried long distances, and not break, tear, shred, dissolve, rust, or diminish in size or weight.

Money must be durable to be an effective medium of exchange.

Money that was easily perishable or subject to decay would not last long enough to be useful as a medium of exchange. For example, perishable goods such as fruits, vegetables, or meat would not be a suitable form of money because they would rot or spoil quickly.

Durability also contributes to fungibility, the property of sameness. Fungibility permits the individual units or parts of a commodity to be interchangeable. Each part is indistinguishable from any other part. If the material were not durable, the parts would wear, decay, erode, and become different from one another.

In contrast, metals like gold and silver are durable and can last for centuries without deteriorating. This durability makes them a suitable form of money, and they have been used as such for thousands of years.

In modern times, paper currency still exhibits this physical durability. The “paper” used to create US dollar bills is not paper at all. It is a blend of 75% cotton and 25% linen fibers that are mixed with water to form a pulp. This unique blend of materials makes the paper very durable and resistant to wear and tear, as well as surviving the wash cycle.

The paper is produced by Crane Currency, a company that has been producing banknote paper for the US government since 1879.

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Pure gold and silver were rarely used for coinage.

Using a small amount of another metal served two purposes.

First, it gave the metal strength, which improved durability and prevented clipping and erosion from use. Second, the seigniorage covered the cost of producing the coin.

GOLD Australian dollar bills are made from a polymer substrate, which is a type of plastic material. The polymer banknotes were introduced in Australia in 1988, becoming the first country in the world to adopt this technology for currency. Polymer banknotes are made from a type of plastic film that is stretched in two different directions to increase its strength and durability.

Polymer banknotes offer several advantages over traditional paper banknotes, including increased durability and lifespan via greater resistance to tearing, crumpling, and other forms of damage. Polymer banknotes are less likely to harbor bacteria and other contaminants than paper banknotes, which can improve hygiene and reduce the spread of disease.

Durability is the single thing that gives money its ability to be used as a store of value.

Store of Value Does Not Mean Stable Price You will often hear economists and politicians criticize Bitcoin as not useful as money because it is not a good store of value. They are referring to the very high price volatility that Bitcoin exhibits.

When we speak of the functions of money, store of value does not mean stable price. It means it’s durable.

Price stability has never been a required feature of money, but When held for a admittedly it helps. And while it’s true that Bitcoin’s price is volatile, period of three so are the prices of many other stores of value. years or more, Gold’s price is volatile. It was so volatile that in the US the Bitcoin has outprice was fixed by law for over 100 years. Since 1971, the one-year performed the change in the price of gold has typically varied from a loss of -25% to dollar every time.

That seems like a a gain of +120%. From 1980 to 2001, gold prices declined by over reasonable store 50%. It would be 27 years before gold would recover to its previous of value proposi- high of $698. In that time, it lost 60% of its real value due to inflation. tion.

A few years later, from 2012 to 2016, gold lost 30%. This hardly seems like the price stability people associate with the notion of “store of value.”

800 700 600 500 400 300 200 100

2007

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1980

0

Nominal Price of Gold, 1980-2007.

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THE DEBAUCHERY OF CURRENCY Real estate is also used as a store of value. In any given year, US home prices have lost -20% or gained +10%. From 1894 to 1919 it’s estimated that the average US home price declined by over 50%.

This is adjusted for inflation, so this is the decline in the real price.

From 2006 to 2011, US real home prices dropped every single year and lost a total of 35%.

“Store of value” means more than just a steady price. It also encompasses the integrity and durability of characteristics that prevent decay, wear, corrosion, or other change through time. Despite all the price fluctuations, gold is still gold, land is still land, and one Bitcoin is still one Bitcoin.

Divisible To be an effective medium of exchange, Aristotle argued that money should be able to be broken down into smaller units to facilitate transactions of different sizes. That is only part of the picture. Money must be divisible without any resulting loss of value or property to any of the parts. Thus, a small part of money must have all the properties of good money itself.

Money is the great equalizer, the thing that makes it possible to compare two things of different sizes and usefulness. Cattle, feathers, and teeth may have some good attributes, and that is one reason they were used as money, but they are not divisible.

Portable Imagine carrying a barrel of crude oil with you every time you went to lunch with a friend. Oil is durable, divisible, and scarce, but not portable.

Money exists for convenience. To be convenient, it must be able to be carried from place to place, and on your person, without much trouble. In a physical setting, solving the coincidence of wants means the transacting parties must be at the same place at the same time. This means taking your money with you to the place where the things are being transacted.

Scarce Aristotle observed that money had to have independent value, meaning the thing itself had some usefulness outside its use as money.

This would certainly be the case for early money forms like barley and cattle.

Over time, the property of independent value morphed into the concept of scarcity. To be scarce, an element must meet all four of these criteria: not easily obtained, useful in its own right, counterfeit resistant, and requires an economic choice to acquire.

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GOLD Scarcity is such an important and misunderstood concept we will discuss it in detail.

Work is an integral part of what gives money its value. Something that is difficult to obtain requires work to obtain it.

Without work, money is not scarce and therefore cannot represent something of value..

Money is just work that has been converted into a medium of exchange.

Not Easily Obtained Scarcity is a term that is often misused, especially with Bitcoin.

Scarcity is frequently conflated with limited supply. Scarcity may mean limited supply in colloquial speech, but in economics scarcity has a special meaning.

Radioactive waste is rare and in limited supply. Does that mean it has value? No. My signature on a piece of paper is scarce. Does that mean it has value? No. On the other hand, whale’s teeth are not easy to come by. Harvesting the tooth of a whale requires considerable work. Finding certain rare shells or feathers means work. Raising cattle takes work.

Mining gold also requires work. While there are some places, like Western Australia, where nuggets can be found lying on the ground, it is more typical that gold must be dug up, leeched, and smelted. Work is an important concept in scarcity and hence money.

A group of bandits rob a train carrying gold, circa 1880.

Useful in its Own Right When Aristotle described the property of ‘independent value’ he was referring to the material or element used to serve as money. Foodstuffs certainly had an independent use beyond money. Precious metals also had independent value, having been used as jewelry, decoration, gifts, and tribute.

Counterfeit Resistant If something has value and is useful in its own right, people are going to want more of that thing. If something is difficult to obtain, then some people will resort to deceptive fabrication to get what they want.

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THE DEBAUCHERY OF CURRENCY Counterfeit resistance can come in two forms. The first is uniqueness. The second is complexity.

Counterfeit resistance through uniqueness is associated with commodity money. Commodity money is a type of currency that is backed by a physical commodity with intrinsic value. This means that the currency is directly convertible into a specific amount of the commodity that backs it. Examples include gold, silver, teeth, cattle, and tobacco.

These are physical elements and compounds that are not able to be replicated.

Counterfeit resistance through complexity is associated with representative money. Representative money is a type of currency that represents a claim on a physical commodity or asset, such as gold or silver but does not have an intrinsic value of its own. In other words, it is a form of currency that is backed by a tangible asset but is not directly convertible into that asset. Banknotes and other paper money are prime examples of representative money.

A tungsten slug wrapped in gold.

Modern counterfeiting countermeasures include watermarks, security threads, color-shifting ink, and holograms. Even poker chips have specific material compositions, UV markings, and RFID tags.

Requires an Economic Choice So now we have something difficult to obtain, useful, and not easy to duplicate. If we aren’t willing to do the work ourselves to obtain it, how do we get it? Obtaining something of value requires giving up something of value in return.

Air is essential to human life. There is a fixed amount of breathable air in the atmosphere. It certainly has independent value; without it, 28

The ancient Greek mathematician and inventor Archimedes was concerned the king’s gold crown might be debased with lesser metals. He needed a way to detect the purity of the gold in the crown.

While taking a bath, he observed the water level rise as he entered the bathtub. He realized that he could measure volume of a gold crown by submerging it in water and comparing the water displacement to that of an equal weight of pure gold. This discovery supposedly excited him so much that he shouted “Eureka!” meaning “I found it!” to express the joy at his discovery.

GOLD you would die. And it can’t be duplicated, at least not easily. Is it scarce?

No. As you go about your day, you do not make an economic choice to obtain the air you breathe. You don’t have to give up anything of value, and you don’t even have to think about obtaining it. The same is true for sunlight, and in most parts of the world, fresh water.

Some Bitcoiners might point out the possibility that asteroids in space may contain millions of tons of gold. This, they claim, means gold is not scarce and has less value than people suppose.

However, the gold on an asteroid in space is unobtainable.

Whether it’s a million miles away or ten billion miles away, you can’t get it.

Suppose one of several space billionaires discovers gold on Mars and wants to mine it. This gold is also scarce because it requires an economic sacrifice to obtain. Even so, the cost to mount a mission to mine and retrieve the gold would probably exceed the value achieved from that effort. Even if Martian gold is practically obtainable with technology, it is economically infeasible, and therefore still scarce.

Gold’s scarcity on earth is real. There is a physical limit to the amount of gold on the planet. Land is also scarce. These things have physical, practical supply maximums, and they are economically difficult to obtain. We must make choices about how much of each we need, and that involves a trade-off: we sacrifice some of one to obtain more of another. That is a consequence of economic scarcity: a choice with an opportunity cost.

Bitcoin’s scarcity, on the other hand, is artificial and arbitrary.

The choice to establish 21 million Bitcoin could have just as easily been 21 billion or 21 thousand. To illustrate the arbitrariness of this number, software engineers Billy Markus and Jackson Palmer created DogeCoin with an initial maximum supply “capped” at 100 billion coins in an attempt to mock Bitcoin’s artificial scarcity.

That said, Bitcoin is difficult to obtain and practically impossible to counterfeit. This is what gives Bitcoin its scarcity: we must make choices about how much Bitcoin to have and balance that cost against other things which are also scarce like food, clothing, and shelter.

Accepted The characteristic of acceptance is perhaps the most important element of good money. Acceptance was absent as a criterion from Aristotle’s list, perhaps because existing money was, obviously, already accepted.

As economies grew and technology produced more forms of money, acceptance became more important. No matter how well it meets the other criterion, if nobody accepts your money, what good is it?

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THE DEBAUCHERY OF CURRENCY A businessman performed some energy contract work on the island nation of Trinidad and Tobago (T&T). He admitted he did not read the contract carefully and was paid in T&T dollars. This was a very large contract, and the payment was quite large. Unfortunately, he did not live in Trinidad and Tobago, so he had to exchange T&T dollars for US dollars.

The problem was that nobody wanted to give up their US dollars for T&T dollars. Bear in mind this was a very large sum of money, and it was more than most banks could handle. Even the Swiss banks would not do the exchange. After all, what are they going to do with truckloads of T&T dollars? It might have been more money than what all the tourists visiting Trinidad might exchange at the airport in a year. It was more money than could reasonably be spent on the islands unless perhaps one bought a large house or tract of land. But for such large purchases, they almost always used US dollars anyway.

At the time, it was not even possible to exchange T&T dollars for Bitcoin. No Bitcoin exchanges wanted T&T dollars either. Eventually, a partner was found to make the exchange, but only at a significant discount to the market price. T&T dollars may qualify as good money on the island of Trinidad, but not anywhere else.

This is not a problem with the US dollar. Throughout the world, the US dollar is the most widely accepted currency. In 2023, over 80% of international transactions were conducted in US dollars. But is it widely accepted because it has the most trustworthy value, or does it have the most trustworthy value because it is widely accepted? Later, we will answer the question: “What gives the US dollar its value?”

WHY GOLD IS MONEY Of all the naturally occurring elements on earth, which are suitable to meet the four physical criteria of good money? Let’s start with the periodic table of elements. Then by process of elimination, we’ll remove elements that don’t meet every one of the good money criteria.

Portability means it can’t be a gas. That eliminates hydrogen and noble gases. It can’t be organic; those things decay and are not durable.

Many metals don’t react well with air or water. Iron rusts, pure sodium explodes, and mercury is a liquid. Some materials like asbestos are health hazards, so we can’t have that as money. And many metals like aluminum have good qualities but they are easily obtained (so not scarce).

Some metals are too tough or brittle to be easily divisible, like tungsten.

Others, like titanium, have a melting point that is too high to be useful for making coins.

When you look at all the possible elements that could meet the criteria for good money, less than ten make the list. These are known as noble metals. Noble metals are metallic elements that show

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GOLD outstanding resistance to chemical attack even at high temperatures. The shortlist of chemically noble metals includes ruthenium (Ru), rhodium (Rh), palladium (Pd), osmium (Os), iridium (Ir), platinum (Pt), gold (Au), and silver (Ag). This classification is called the platinum group. Some lists also include copper (Cu) and to a lesser extent, nickel. This classification is called the coinage group. Americans will recognize nickel as the name of an actual coin—a 5-cent piece.

Of the four metals in both the coinage group and the palladium group, palladium, and platinum are too rare to be useful to make coins.

There isn’t very much of this material on earth, so the cost to obtain it is too high relative to its value as money. Also, the coins would have to be very small. That leaves just gold and silver.

What makes something money are its characteristics: portable, durable, divisible, scarce, and accepted. Anything that meets these criteria can be good money.

Money may be used in just one of three different ways: as a medium of exchange, a store of value, or a unit of account. It should at least be used as a medium of exchange, otherwise, it will not solve the coincidence of wants.

It may be used as either of the other two: store of value or unit of account. Even if it not used in these two capacities, it is still money because a medium of exchange is money by definition.

The platinum group (red) and coinage group (green) of noble metals.

Gold is less abundant than silver. It is more malleable, even at room temperature, and so this makes striking coins much easier. Silver tarnishes, but gold never does. When it comes to making coin money, gold’s characteristics give it a slight advantage over silver; hence it is worth more.

This is why gold has value as money. Its softness makes it divisible, which makes it portable. It meets all four criteria associated with scarcity. It is durable, keeping its quality forever. Its density, which gives it weight, makes it feel like it’s worth more than other metals. It is easily melted into jewelry and re-cast into coins without much heat. It can be stamped or engraved with denominations and names of kings and kingdoms. So unique and valuable is gold that pseudoscientists called alchemists tried for centuries to turn lead into gold. Gold is special because there is nothing else like it on earth.

Gold is the oldest form of money that meets all five of these criteria. Not coincidentally, Bitcoin also meets each of these five properties of good money, which is why it is sometimes referred to as “digital gold.” To understand that Bitcoin is money, you must first understand that gold is money.

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THE DEBAUCHERY OF CURRENCY

Gold’s Price Behavior The continued issuance of government debt can have an impact on the price of gold over time. When governments issue debt, such as Treasury bonds, they essentially borrow money from investors in order to finance their operations or fund various projects. This creates an increase in the overall money supply in the economy. If the increase in money supply is not accompanied by a corresponding increase in economic output, the value of bad money created by debt declines relative to good money like gold. In other words, the price of gold increases since it represents a viable savings vehicle to preserve wealth for the future.

Gold $/oz

1,000 5,000 100

10

Gold Debt

500 50

1 1946 1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 2018 2022

5

US Government Debt Billions

50,000

The issuance of government debt debases the national currency, which makes gold more valuable as a store of wealth.

Price Manipulation in the Precious Metals Markets You’ll notice two bubbles in the price of gold, one in 1980 and another in 2011. Though inflation was abnormally high at the time, it was not the primary cause of the increases. These were periods where prices in the metals markets were manipulated.

In 1980, the Hunt brothers, Nelson Bunker Hunt and William Herbert Hunt, along with other family members, attempted to corner the silver market by accumulating a significant amount of silver futures contracts and physical silver. Their intention was to drive up the price of silver and profit from their holdings. This increased demand for silver spilled over into the gold market as well, under the dubious belief that the prices of gold and silver must maintain a certain price ratio at all times.

Between 2008 and 2016, JPMorgan engaged in a pattern of manipulation in the precious metals markets. Traders would place orders on one side of the market which they never intended to execute, to create a false impression of buy or sell interest that would raise or depress prices.

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GOLD This manipulative practice, which is designed to create the illusion of demand, or lack thereof, is known as “spoofing.” In 2020, JPMorgan Chase & Co agreed to pay more than $920 million and admitted to wrongdoing to settle federal U.S. market manipulation probes into its trading of metals contracts.

THE THREE FUNCTIONS OF MONEY

Throughout history, money’s enduring principle is the faith between the transacting parties. All other considerations are secondary. So long as there is trust, anything can serve as a medium of exchange. But history is full of breaches of that trust.

Economists often confuse the functions of money with the characteristics of money.

What makes something money are its characteristics: portable, durable, divisible, scarce, and accepted. For something to be good money, it must have all five of these characteristics. Anything that meets these criteria is money.

Once something meets the five money criteria, it may be used in just one of three different ways: as a medium of exchange, a store of value, or a unit of account. It must at least be used as a medium of exchange, otherwise, it will not solve the coincidence of wants. It may be used as either of the other two: store of value or unit of account.

Keep in mind, for thousands of years money was sticks, stones, shells, and teeth. These things were still money even though they did not fare well as a store of value or unit of account.

Medium of Exchange By definition, money is used in exchange for goods and services.

For something to be a medium of exchange, it must solve the coincidence of wants. This greatly reduces transaction costs because people no longer need to barter. In other words, you can just walk into a store and buy a pair of jeans (or whatever you need) in exchange for your money.

This only works if the seller is confident that he will be able to use the currency he receives to buy goods or services of equal value later on. In that regard, money’s value depends on faith.

Unit of Account Money is also a measure of economic value. We count things in monetary terms. Every good you can buy in a shopping center has a price tag on it. The value of labor—wages and salaries—is measured in monetary units. Money makes it possible to easily compare the value of completely different things.

It even makes it possible to compare services to goods, and goods to property: you must work 2 hours to afford a night at the movies; it will take 1,000 hours of work to buy a car; a house is worth 17,638 pizzas.

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THE DEBAUCHERY OF CURRENCY

Store of Value Money can serve as a store of value. This means it can be used to transfer buying power into the future. For instance, if you sell your car, you can keep the money for a while and use it to buy a new car later in the future. For this reason, money needs to be durable and must not lose its value over time.

Money can lose some of its purchasing power due to inflation, but this is not quite the same as losing the ability to store value because it rots (like a tomato) or has been ravaged by time (like wood and stone).

THE GOLD STANDARD Gold was the most widely used form of money in history. As countries and economic markets matured, they implemented a uniform currency regime known as the gold standard.

The gold standard is a monetary system in which the standard economic unit of account is based on a fixed quantity of gold. The gold standard was widely used in the 19th and early part of the 20th century.

The gold standard was originally implemented as a gold specie standard, by the circulation of gold coins. The gold specie standard arose from the widespread acceptance of gold as currency. The US Constitution specifically mandates gold and silver coin as the only acceptable form of currency states could use. That same article prohibited the individual states from making their own specie (but not their own paper money).

“No State shall … coin Money … [or] make any Thing but gold and silver Coin a Tender in Payment of Debts…” —Article 1, Section 10

The Coinage Act of 1792, established the United States Mint and created the nation’s monetary system. Section 19 of the Act is known as the “Debasement Clause.” Having learned from Rome, Byzantium, England, and Prussia, the Founding Fathers knew well of the dangers of currency debasement and did what they could to prevent it.

“And be it further enacted, That if any of the gold or silver coins which shall be struck or coined at the said Mint shall be debased or made worse as to the proportion of fine gold or fine silver therein contained, or shall be of less weight or value than the same ought to be pursuant to connivance of any of the officers or persons who shall be employed at the said Mint, for the purpose of profit or gain, officers or persons shall embezzle any of the metals which shall at any time be committed to their charge for the purpose of being coined at the said Mint, every such officer or person who shall commit any or

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Currency debasement was once deemed so destructive to society that it was punishable by death. Sadly, now currency debasement is a matter of accepted policy.

GOLD either of the said offences, shall be deemed guilty of felony, and shall suffer death. ”

After reigning supreme for 5,000 years, gold is no longer significantly used as a medium of exchange anywhere in the world. What happened?

The success of metal money like gold came with a hidden cost.

Rulers and governments eventually realized that by slimming down the coins to smaller weights and mixing them with cheaper base metals, they could enrich themselves by circulating debased currency worth less than what people expected. Could you spot the difference between a 4-ounce coin and a 5-ounce coin without a scale or training? Or a solid gold coin and one that was 80% gold and 20% tin? If they both had the King’s face on them and were roughly the same size, you wouldn’t notice. Neither did the ancients. Governments have been intent on cheapening the value of money for as long as gold has been money.

THE BEGINNING OF THE END OF AN ERA It was Holy Week, an ordinary Monday after Palm Sunday in 1882. Jesse James was at home with his family when he heard a knock at the door. He answered the door without hesitation, and in walked his most trusted friends Charley and Robert Ford. Today was a big day.

They planned to travel to Platte City for another robbery.

After a discussion about a recent murder confession by an associate, James walked across the living room and laid his revolvers on the sofa. He turned around and noticed a framed needlepoint picture, made by his mother, hanging crookedly on the wall. Jesse stood on a chair to straighten it and brush off dust. Robert Ford drew his weapon. Jesse turned slightly as he heard the sound of Bob’s pistol hammer cocking back. Ford shot the unarmed Jesse James in the back of the head.

1882 was the start of what would be a dismal period in US economic history. Over the next thirty years, the United States would suffer four of the worst financial panics in its history. Partly to blame was a run on the gold supply and a policy of using both gold and silver metals as a peg for the US dollar value. By 1907, the financial system was in a virtual freefall, and people everywhere pulled their deposits out of regional banks.

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BAD MONEY: A VERY BLOODY HISTORY CHAPTER 4

BAD MONEY: A VERY BLOODY HISTORY Dishonest money dwindles away.

—Proverbs 13:11

O

utnumbered five-to-one, the few remaining men of an original group of 400 surveyed what was sure to be the last of what had been many assaults. Advancing with their bayonets drawn, the enemy marched over their own dead to converge on a position that was little more than a farmhouse in a field. The defenders met them, yet again, with muskets and sheer will. Exhausted, bloody, outgunned, and running low on ammunition, the dwindling band of men refused to give up. Their courage was infectious, and their action would inspire the rest of the army to keep fighting for years to come.

That battered army, all that was left of an emerging nation’s fighting force, was at the same time making a hasty retreat for survival.

If the men at the farm could hold off the advance for just a while longer, the main force would escape to fight another day.

They threw themselves at the enemy one last time.

Observing their sacrifice from his post overlooking the old Dutch Farmhouse, the commanding general remarked with pride and sorrow, “Good God! What brave fellows I must lose this day!”

MONEY: THE CAUSE OF REVOLUTIONS, PART 1 The exchange of money was necessary for commerce in ancient times, and moneychangers filled this role. Moneychangers provided a crucial service in ancient societies, where different regions had their currencies, each with its own value. The job of a moneychanger was to convert coins or currency from one region or country to another, typically taking a commission for their services. The need for moneychangers arose from the fact that currency and coins had varying weights, sizes, and values, making direct exchange between two parties difficult.

Moneychangers served as a kind of early banking system. They often kept records of transactions and held deposits, allowing for the 37

THE DEBAUCHERY OF CURRENCY safekeeping of money. Moneychangers would issue receipts for deposits, which could be used as a form of payment to a third party. This practice is similar to modern-day banking, where individuals deposit funds in a bank, which are then lent to others, with the bank providing a safe place to store money.

In the New Testament, moneychangers are mentioned in several passages, including Matthew 21:12, Mark 11:15, and John 2:14-15. In these passages, Jesus drives the moneychangers out of the temple, overturning their tables and accusing them of turning the house of God into a “den of thieves.” This has led to much discussion about the role of the moneychangers in the temple and the reasons behind Jesus’ actions.

One of the reasons why the moneychangers were present in the temple was to facilitate the payment of the temple tax. This tax was required of every Jewish adult male and was used to support the temple and its activities. The tax had to be paid in the local currency, which at the time was the Tyrian shekel. The moneychangers would exchange other currencies, such as Roman denarii, for the Tyrian shekel so that people could pay the tax. They would also exchange money for pilgrims who had come to Jerusalem for the festivals.

Moneychangers were subject to criticism and suspicion. They were seen by some as dishonest and exploitative, taking advantage of their position to charge high fees for their services.

In a free market, if an unfair exchange rate is charged, a merchant can simply find another exchange partner. For commercial goods, these market forces keep exchange rates in equilibrium. However, taxes are a legal matter, and failure to pay can have serious, life-altering consequences. By specifying the amount to be paid and the method of payment, authorities could charge whatever they wanted, knowing that the individual had no choice but to pay the rate or risk ruin. This was particularly true of the moneychangers in the temple, who were accused of charging exorbitant exchange rates and taking advantage of pilgrims.

Jesus’ actions in driving the moneychangers out of the temple were seen by many as a rebuke of these practices. The scene at the temple is significant. Within a week of this event, Jesus would be brutally executed and the foundations for the world’s largest religion would be laid. The story itself has served as a warning to governments and bankers alike for over two-thousand years. And centuries later, history will repeat itself with global consequences just as pivotal.

CREDIT Now, back to ancient Mesopotamia. Coinage, regardless of how it is implemented, has problems. Food products, for example, are subject to spoilage and must be sold immediately. Other items, such as furniture or ox carts, take time to build. This disconnect between delivery and use

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BAD MONEY: A VERY BLOODY HISTORY

A right to money is itself money, particularly if it is exchangeable.

times interfered with satisfying the double coincidence of wants. The Mesopotamians solved this problem too, with credit.

Merchants would give out loans, and interest rates were charged on the loans. The concept of credit allowed traders to expand their businesses and facilitated trade, leading to further economic growth in the region.

Credit is just money without specie. Credit can be an oral agreement, or a written one. Written agreements are called “notes” or sometimes “bonds” or “bills.” And before such money notes were written on paper, they were carved in wood.

The Tally Stick In Oxford, England stands the Ashmolean Museum. Inside are several modest sticks of willow, about eight inches (20cm) long, called Exchequer tallies. This willow was harvested along the banks of the Thames, not far from the Palace of Westminster in central London.

These tallies were a way of recording debts with a system that was simple and effective.

In the small communities of ancient Europe, people would trade among themselves: a pair of shoes for some bread, a plot of land in exchange for 10 head of livestock, etc. Some of this would be paid for with loans. A willow stick would be used to record this debt. For example, “₤2 pounds (gold weight) in exchange for 20 sheep and 6 goats.”

Notches and notations would be made on the stick, like two puzzle pieces that fit together perfectly.

The stick would then be split in half, down its length from one end to the other. The debtor would retain one half (called the “foil”), and the creditor would retain the other half. The creditor’s portion was called the “stock.” Even today, British bankers sometimes use the word “stocks” to refer to the debts of the British government.

A tally stick. —Hampshire Cultural Trust.

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THE DEBAUCHERY OF CURRENCY The two halves would match only each other, both from the grain pattern inside the wood and from the notches, words, and brands carved into it. This type of security system kept a debtor from forging a new foil that showed a lesser amount of money owed. If the two stick parts didn’t match up, then one party was attempting to cheat! Of course, the Treasury could simply have kept a record of these transactions in a ledger somewhere. But the tally stick system enabled something radical to occur.

Rather than a lender exchanging the stick for gold, the lender could simply exchange the tally stick for something else of value. After all, if the stock-holder was owed ₤5, did it matter who they got the ₤5 from? The tally stock itself was worth close to £5 in its own right. If you wanted to buy something, you might well find that the merchant would be pleased to accept the tally stock as a safe and convenient form of payment.

The tally sticks themselves became a kind of money, a tradeable debt that could be exchanged freely, circulating from person to person.

A tally stick that said, “£5” was just as good as having 5 pounds of gold.

PAPER MONEY Tally sticks are a form of representative money also called token money. Typically, representative money is associated with fiat currency while token money is associated with fiduciary currency.

Representative money refers to currency or coins that have little to no intrinsic value but are recognized as a medium of exchange by their use. These tokens are usually made of cheap materials like base metals or paper, and their value is derived from the trust and confidence that people place in the token: in other words, faith in acceptance.

Paper money is made of cheap materials like cotton or paper and has no intrinsic value. Its value is derived from the trust and confidence people place in the issuing authority, such as a central bank or a government.

Plastic tokens or chips are used in casinos or amusement parks as a substitute for cash. These tokens have no intrinsic value but are used as a medium of exchange in a specific environment where they are recognized and accepted.

Gift cards or vouchers are used as a form of token money in retail stores or online shops. These cards or vouchers have no intrinsic value but can be redeemed for goods or services at the store or online shop.

The Adventures of Marco Polo Marco Polo was an Italian merchant, explorer, and writer who is best known for his extensive travels to Asia during the 13th century.

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The word “stock” can be traced to the Old English word “stoc” which referred to a tree trunk or a wooden post.

The “stockholder” had the claim to the assets, represented by carvings in wood.

BAD MONEY: A VERY BLOODY HISTORY He was born in Venice, Italy, in 1254 into a family of merchants. His father, Niccolò Polo, and his uncle, Maffeo Polo, were successful traders who had already established connections in the East.

In 1271, when Marco Polo was just 17 years old, he embarked on a journey to the East with his father and uncle. They traveled along the Silk Road, an ancient network of trade routes that connected Europe with Asia, reaching as far as China. Their travels took them through Persia (present-day Iran), Central Asia, and eventually to the court of Kublai Khan, the Mongol emperor of China.

Marco Polo spent 17 years in the service of Kublai Khan. Polo traveled extensively within the Mongol Empire, visiting various regions and cities, including present-day China, Mongolia, India, and Southeast Asia. He became well-versed in the local customs, languages, and cultures, which greatly influenced his writings.

Upon their return to Venice in 1295, the Polo family faced a city at war with the Republic of Genoa. Marco Polo was captured and imprisoned during a naval battle in 1298. While in prison, Polo dictated his experiences and adventures to a fellow inmate named Rustichello da Pisa.

The resulting book, "Il Milione" (The Travels of Marco Polo), became one of the most famous travelogues in history.

"The Travels of Marco Polo" provided detailed accounts of the lands he visited, describing the wealth, grandeur, and wonders of the East. His writings introduced Europeans to exotic places, spices, silks, and other valuable goods. However, his accounts were met with skepticism and disbelief by some Europeans, who considered them exaggerated or even fictional.

Nevertheless, Polo’s book played a crucial role in expanding Europeans’ knowledge of the world beyond their borders. It inspired future explorers, such as Christopher Columbus and Vasco da Gama, and contributed to the Age of Discovery. In the court of the great Mongol emperor Kublai Khan, Marco lived among the nobility. He spent years learning their customs, their language, and their ways of life. He became a trusted advisor to the Khan.

But it was in the city of Khanbaliq, the Mongol capital, that he witnessed something truly extraordinary—the use of paper money.

Instead of the gold and silver coins he was used to, the merchants of Khanbaliq exchanged small slips of paper, each one carefully marked with the value it represented. To Marco Polo, it seemed almost absurd. Paper was not money!

As he watched the transactions taking place, Polo couldn’t help but be amazed. He saw traders haggling over the price of goods, the paper money changing hands with speed and confidence. It was a testament to the ingenuity and innovation of the Mongol people, who had found a way to streamline commerce and make it easier.

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THE DEBAUCHERY OF CURRENCY For Marco, this was more than just a curiosity—it was a revelation. It was as if monetary value were being created out of thin air! In the 13th century, Marco Polo wrote about the use of paper money in China and described it as a “marvelous thing.”

Upon his return to Venice, Marco regaled his fellow citizens with tales of his incredible adventures, from the glittering palaces of the Far East to the dark and mysterious heart of Central Asia.

Still, whenever he told his countrymen of the paper money he witnessed in China, they always asked the same question: “How can paper with writing be used as money, since both paper and ink are obtained with ease?”

Counterfeiters Will Be Decapitated Paper money was first developed in China during the Tang Dynasty (618-907 AD) and later refined during the Song Dynasty (960-1279 AD). The first recorded use of paper money in China was in the Sichuan province in the 7th century. It was used as a substitute for coins, which were heavy and difficult to carry in large amounts.

In the late 1200s, Mongolian Emperor Kublai Khan— the grandson of Genghis Khan—made paper money the dominant form of currency.

Like many other cultures, China was using a variety of materials such as copper coins and silk notes as currency. However, the country’s economy was growing rapidly, and there was a need for a more efficient and reliable form of money. Kublai Khan saw an opportunity to modernize China’s currency system and increase economic growth by introducing paper money.

The idea of using paper as currency was not new in China. The country had been using paper money in limited quantities for centuries, but it had not been widely adopted as a means of exchange. Kublai Khan’s innovation was to create a national paper currency that was backed by the government and could be used by everyone in the country.

Kublai Khan’s paper money was called Jiaochao, which translates to “exchange note” or “currency note.” The notes were made from mulberry bark and were decorated with intricate designs and calligraphy.

They were also issued in different denominations, ranging from one to ten thousand units.

One of the main advantages of paper money was that it was lighter and more portable than copper coins or silk notes. This made it easier for people to carry large amounts of money for trade or commerce.

Paper money was also more durable than silk notes, which could be easily damaged or torn.

However, one of the challenges of introducing paper money was that it required a high level of trust in the government. For people to accept paper money, they needed to believe that it was backed by the full

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BAD MONEY: A VERY BLOODY HISTORY faith and credit of the government. This was particularly challenging at a time when counterfeiting was a common practice.

To address this issue, Kublai Khan created a sophisticated system of paper money that included security features such as watermarks and serial numbers. He also established government-run banks that would exchange paper money for precious metals, such as gold and silver, at a fixed rate. This helped to ensure the credibility and stability of the currency.

As one would expect, counterfeiting of paper money was a major issue. Kublai Khan had a practical solution: he promised to cut off the heads of anyone who counterfeited his Jiaochao. The promise was written directly on the paper notes: “Counterfeiters will be decapitated.”

This paper money was not completely backed by gold or silver. The government faced fiscal problems, partly due to the extensive military campaigns and extravagant spending by the ruling elite. The short-lived Yuan Dynasty printed increasing amounts of the currency to pay for it all.

The empire faced economic difficulties, including inflation, high taxation, and corruption. The Red Turban Rebellion was the result. A major uprising, it played a pivotal role in the collapse of the Yuan Dynasty and the subsequent rise of the Ming Dynasty. The rebellion lasted from 1351 to 1368 and involved various rebel groups but was mostly led by a secret society known as the Red Turbans.

Historical records commonly portray the Red Turban Army as dealing with captive Yuan officials and soldiers with considerable violence. In his work on violence in rural China, William T. Rowe writes: “The Red Army brutally killed every Yuan official it could lay its hands on: in one instance… the army flayed an official alive and cut out his stomach. The Red Army was equally merciless toward captured Yuan soldiers: according to contemporary observer Liu Renben, Tianwan troops dealt with these demonized enemies by ‘placing them in shackles, poking them with knives, binding them with cloth, putting sacks over their heads, and parading them around accompanied by drum-beating and derisive chants.’”

Kublai Khan’s Jiaochao was an innovation. Paper money fostered stability and standardization in the monetary system, or so it seemed. Jiaochao helped facilitate trade across the vast Mongol Empire.

For a time, Jiaochao played a role in financing government operations and supporting the development of infrastructure projects, such as the Grand Canal, which improved transportation and trade routes.

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THE DEBAUCHERY OF CURRENCY The allure of having all the money you wanted, whenever you wanted it, was too great. The Mongol rulers imposed heavy taxes to support their military campaigns and extravagant lifestyle, resulting in an increased money supply. This led to inflation and economic disparity, The wealthy do with the wealthy benefiting from the Jiaochao system while the lower not feel the pain of inflation; they classes struggled with rising prices and financial difficulties.

Money Backed by Nothing Nicholas Barbon was an English economist, physician, and financial speculator who lived from 1640 to 1698. He is best known for his pioneering work in the field of insurance and for being one of the founders of the modern insurance industry. He also did the unthinkable when he invented fiduciary currency: private money backed by nothing.

Barbon was born in London in 1640, the son of a French refugee who had fled religious persecution in his homeland. He was educated at Oxford University, where he studied medicine, but his interests soon turned to finance and economics.

In the late 1660s, Barbon became involved in the rebuilding of London after the Great Fire of 1666. He saw an opportunity to profit from the rebuilding effort and began buying up damaged properties, which he then repaired and rented out at a profit. He also helped to finance the rebuilding effort by investing in government bonds.

Barbon was a controversial figure, known for his sharp business practices and his willingness to take risks. He became involved in various financial schemes and was often accused of fraud and deception. Despite this, he was a highly successful businessman and made a fortune in the London property market.

In addition to his work in finance, Barbon was also a pioneer in the field of insurance. In 1680, he founded the first fire insurance company in London, the Fire Office, which provided coverage for damage caused by fire. This was a revolutionary concept at the time, as insurance was not yet a widely accepted practice. Barbon’s Fire Office was a great success, and other insurance companies soon followed.

Barbon also made important contributions to the development of modern economic theory. He was one of the first economists to argue that the market was a self-regulating mechanism that could operate without government intervention. He believed that competition was the key to economic growth and that the state should not interfere in the workings of the market.

Barbon’s most important contribution to economic theory, however, was his role in the development of paper money in Europe.

Despite Marco Polo’s enthralling tales about the benefits of paper money in China, the Europeans insisted on using only “real money” in the form of gold and silver coins.

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simply cut back on a few extravagances. The poor always do, because so much of their income is spent on necessities.

Barbon sounds like the perfect guy to invent paper money backed by nothing!

How times have changed! Gold and silver are no longer used as money. Bitcoin is also criticized as “not real money.”

Today, people insist on using only “real money” which is paper backed by nothing.

How did that work out for Kublai Kahn?

BAD MONEY: A VERY BLOODY HISTORY In the late 17th century, England was suffering from a severe shortage of coins, which made trade difficult and hindered economic growth. In 1690, Barbon theorized that “Money has an imaginary value made by law for the convenience of exchange.” Putting his thesis to work, Barbon recognized that paper money could be used as a substitute for coins and began issuing his own notes in 1694.

This was a risky move, as there was no legal framework for the issuance of paper money at the time. Barbon’s notes were not backed by any tangible asset, such as gold or silver, and their value was therefore uncertain. However, the notes were widely accepted by merchants and traders, and Barbon’s experiment proved to be a success.

Barbon died in 1698, but his legacy lived on. He was a pioneering figure in the world of finance and economics and his contribution is directly responsible for what people today consider money.

How appropriate is it that the Tower of London, where Anne Boleyn and others were executed, is where they also mint the money!?

Gresham told England under Queen Elizabeth I (AD 1558) not to run a coinage system this way.

One-hundred years later, the English government were doing it anyway and things were a mess. Paper money was seen as a stopgap measure while they tried to sort things out. But they couldn’t sort things out. It would take another 100 years to implement Gresham’s original advice, with the Great Recoinage of 1816.

Bank Notes During the late 17th century, the British sterling was in a state of chaos. Before 1662, silver coins were hand-struck. These simple coins lacked reeding or milling, and over the years were clipped around the edges, causing their value to decrease. The machine-struck silver coins produced by the Royal Mint in the Tower of London after 1662 were protected from clipping by an engraved and decorated milled edge, but counterfeiters still managed to forge them through casting or die stamping with counterfeit molds and dies.

By 1695, around 10% of the country’s currency consisted of forged coins. Another problem was that the value of the currency as silver bullion in Paris and Amsterdam exceeded its face value in London, leading to large quantities of coins being melted and shipped overseas in an arbitrage market.

Faced with a shortage of coins, and inspired by the success of Barbon’s notes, the Bank of England began issuing banknotes in 1695.

Backed by government securities, the notes were issued in denominations of £20 and £50. The notes were essentially written promises to pay the bearer the face value of the note in gold or silver coins. The banknotes were an immediate success and were quickly accepted by the public.

The Bank of England’s banknotes were designed with several security features to prevent counterfeiting. The notes were printed on high-quality paper and featured intricate engravings and watermarks. The banknotes also included a promise to pay the bearer the face value of the note in gold or silver coins.

The Great Recoinage of 1696 was an attempt by the English government to replace the old, clipped coins in circulation. The treasury purchased old coins based on their weight rather than face value. Thus, it was better to spend the coin for face value than receive less in exchange

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THE DEBAUCHERY OF CURRENCY for the silver content. The recoinage was not a financial success, and the effort was abandoned just three years later. It had proved impossible to maintain a bimetallic currency system because of the variation in the bullion value of each metal.

The pioneering use of the Bank of England’s banknotes paved the way for later widespread adoption by other banks and governments around the world. Today, paper money is used in every country as a means of exchange.

CLASSIFICATIONS OF MONEY Up to this point, we’ve discussed two types of money: commodity money and representative money. We’ve alluded to ledger money and also mentioned two other classifications: fiat and fiduciary money.

Commodity money, representative money, and ledger money all refer to how the money is implemented: is it physical or virtual?

The terms fiat and fiduciary refer to the source of value of representative and ledger money. The source of value for true commodity money comes from the commodity itself, so the terms fiat and fiduciary do not apply.

Commodity Money Commodity money is another term for physical money, with the qualifier that the physical thing being exchanged has a value unto itself.

Generally, commodity money means gold and silver coins.

Representative Money Representative money is physical money, but the thing being exchanged has no value unto itself (or is less than the value represented).

Representative money is always backed by a commodity or commodity money. Paper money is representative money if it can be exchanged for the thing it represents. For example, a US Silver Certificate Dollar represents physical silver, and it says so right on the face of the bill: “This certifies that there is on deposit in the Treasury of the United States of America One Dollar in Silver payable to the bearer on demand.”

Ledger Money

How did Barbon

Ledger money is virtual money. It “exists” on a computer data- describe money? base or piece of paper, but even that is not necessary since all that is “[A]n imaginary value made by law necessary is an agreement by two parties. Credit is an example of ledger for the convenmoney. Most of what is considered money today is ledger money. Most ience of exchange.” fiduciary currency is ledger money.

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BAD MONEY: A VERY BLOODY HISTORY Fiat Currency Fiat currency has value by force of law. The word fiat means command, dictate, or decree. By definition, fiat money is not “backed” by anything. Most modern government currency, what people today consider “money” is fiat currency. Fiat currency is all the money you typically associate with your economy: wages, the money in your pocketbook, and gifts from grandma.

Fiduciary Currency Fiduciary currency is usually private money whose value comes Despite both Copernicus and from faith in acceptance by the transacting parties. You’ve been using Gresham ‘getting fiduciary currency for most of your adult life. Examples include grocery it right,’ kingcoupons, Starbucks Reward Points, and frequent flyer points. Somedoms, governments, and banks times this money is called a token or token money.

Fiduciary currency typically has limited use. Examples include would continue to debase their tokens to ride the subway, make a payphone call, or play video games. currencies, as well Tokens are often made of cheap metal or paper and carried around like as assign arbitrary cash but can only be spent on the thing for which they are designed. exchange rates to As electronic payments took hold, physical tokens disappeared dual-currency systems, for centu- and were replaced with payment cards and peer-to-peer payment sysries to come. tems. When you spend from a gift card, you are spending tokenized digNot one of these ital money. so-called leaders Still, other tokens are purely virtual: airline and hotel points are paid any mind to economic history. good examples.

Instead, they enacted a policy which, in the words of Copernicus, “destroys republics not in one sudden attack, but gradually,” while “those who are affected…slip miserably through their supine negligence day by day.”

GRESHAM’S LAW Nicolaus Copernicus, born in 1473 in Torun, Poland, is known for his remarkable work in astronomy, which fundamentally changed our understanding of the universe. However, Copernicus was not only an astronomer but also an economist and served as a monetary advisor to the Royal Prussian Mint.

This Tremendous Disaster During the 16th century, Poland was a major European power, with a large economy and a well-established monetary system. However, the system was plagued by issues such as debasement, counterfeit coins, and a lack of standardization. The government recognized the need for reform and invited Copernicus to help.

In 1526, at the request of the King of Poland, Copernicus published Monetae Cudendae Ratio, a treatise on monetary reform. His assessment of the monetary problems of Prussia was incredibly accurate.

Complaining about how governments solved economic problems, he characterized the situation as “this tremendous disaster.” He acutely diagnosed the problem as the repeated debasement of the country’s coins: 47

THE DEBAUCHERY OF CURRENCY “[A] worse one was always introduced, which oppressed and extinguished the goodness of the previous one.”

This statement would form the basis of Gresham’s Law years later. Copernicus’ observations are so important to monetary policy analysis, and so prescient, that the complete translated and annotated text Appendix A is a is provided in Appendix A. must read!

All Your Fine Gold Was Conveyed Out of Your Realm King Henry VIII is famous for his multiple wives and separation from the Roman Catholic Church. His methods often reflected a willingness to use violence and force to achieve his goals.

He had two of his wives executed. When a large-scale uprising known as the Pilgrimage of Grace occurred in 1536, protesting against the religious changes and social issues of the time, Henry suppressed the rebellion through military action, leading to the execution of many of its leaders and participants. Notable members of his close circle of advisors, including Thomas More and Thomas Cromwell, fell out of favor and were executed on charges of treason or heresy. Henry VIII’s attempts to extend English control over Ireland included brutal military campaigns, and often resulted in a massacre of both soldiers and civilians, earning Henry a reputation for ruthlessness. When a cook, Richard Roose, “jokingly” poisoned his diners, Henry invented an entirely new means of execution: boiling alive, slowly. The king is reported to have said “I have cooked the cook!”

King Henry VIII’s lust for power, blood, women, and a lavish lifestyle required money—more money than the kingdom had. In May 1542, Henry issued a decree whereby he ordered that the amount of gold and silver within the country’s coinage be secretly reduced. In what became known as “The Great Debasement,” newly minted debased coins were stockpiled in Jewel Tower in the Palace of Westminster over a period of two years. In 1544, they were circulated to the public. For the next several years, silver content continued to drop, from 92.5% in 1544 to 50% in 1546. By 1549, a “silver” coin was mostly copper and only 33% silver.

English merchants quickly discovered that the new silver groats had become debased and begun offering a lower price for them. The introduction of these debased coins caused coins at similar face value but with higher precious metal content to disappear from circulation, in line with what would become known as Gresham’s law.

Sir Thomas Gresham (1519-1579) was an English merchant, financier, and economist who served as an advisor to King Henry VIII’s daughter Queen Elizabeth I. He recognized that a dual system of highquality currency and debased coins that were worth less than their face value led to a depletion of good money.

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BAD MONEY: A VERY BLOODY HISTORY By the time Queen Elizabeth assumed power, Gresham characterized the economy as being in an “unexampled state of badness.” The explanation, according to Gresham, was that “all your fine gold was conveyed out of this your realm.” The cure, he proposed, was “that good and bad coin cannot circulate together.” Centuries later, this concept was named after Gresham. The concept itself was repeatedly ignored.

Bad Money Drives Out Good Gresham’s Law is an observation about human attitudes toward money and its value. It is a socio-economic principle that explains how different currencies can interact with each other in a market. Gresham’s Law states that “bad money drives out good,” meaning that in a market where two currencies are accepted as payment for goods and services, the currency that has a lower value or is of inferior quality will circulate more widely than the currency of higher value or better quality.

There is an assumption behind Gresham’s Law relating to face value or fixed exchange rates. Bad money drives out good if they exchange for the same price. There are two manifestations of this: disTime and again, abuse of mone- crepancies in face value versus true value, and fixed exchange rates that tary power has create discrepancies between the true values of two currencies. The forresulted in eco- mer is more prevalent with domestic money while the latter is naturally nomic decay, pofound in international trade. litical corruption, When Jesus wrecked the moneychangers’ tables at the temple, civil unrest, that too was Gresham’s Law at work. People were forced to pay their crime, poverty, and bloody war. taxes in good money. This good money was purchased with bad money.

But the rates to exchange bad money for good were exorbitant and did not reflect the value of the underlying metals. This practice put a genuine strain on the economy, not to mention the ordinary citizen. When abused by authority, Gresham’s Law transfers wealth out of the hands of the masses and into the hands of the elite, wealthy, and powerful.

Gresham’s Law also played a role in the economic crisis that occurred in the United States during the late 19th century. At that time, the government issued both gold and silver coins as legal tender. However, due to the difference in the underlying value of the metals, people began hoarding gold coins while using silver coins for transactions. This led to a shortage of gold coins in circulation and a depreciation of the silver coins, which in turn led to an increase in the price of goods and services.

Emperor Slit-Nose and The Twenty Years’ Anarchy Gresham’s Law was the direct cause of a period of collapse of the Byzantine Empire. Justinian II was a Byzantine Emperor who ruled from 685 to 695, and again from 705 to 711. He was known for his ambitious and often controversial policies, including his attempts to centralize power and his efforts to suppress dissent.

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THE DEBAUCHERY OF CURRENCY The standard of the international currency at that time was the Byzantine solidus. The solidus was good money, governed by law and accepted by weight. The solidus was initially introduced by Diocletian in small issues and later reintroduced for mass circulation by Constantine in about AD 312. While the Roman denarius was essentially worthless thanks to excessive and repeated debasement, the solidus was composed of relatively pure, solid gold.

On the obverse, there were three figures of emperor Heraclius and his sons, and on the reverse side, a staff with a crossbar was depicted.

Coins were inscribed “CON OB 72”, in which the first letters “CON” denoted the Constantinople mint, and the letters “OB” denoted the word Obryzum,” which means refined gold. Thus, “CON OB 72” denoted “Constantinople, 1/72 pounds of pure gold (4.5 grams).” A large number of these coins were minted, and they subsequently circulated in world trade for about 80 years.

In 689, Justinian II entered into an agreement with Abd al-Malik ibn Marwan ibn al-Hakam, ruler of the fifth Umayyad Caliphate, to split revenues from conquered territories (Abd al-Malik is perhaps best known for the construction of the Dome of the Rock in Jerusalem around that same time.) The thirty-year peace treaty obligated the Umayyads to pay an annual tribute of 3,000 gold coins, 50 horses and 50 slaves, and withdraw their troops from the forward bases they had occupied on the Byzantine coast.

However, in 692, Abd al-Malik paid the annual tribute specified in the treaty with new coins cast at the mint in Damascus. Now, instead of “CON OB 72,” an inscription in Arabic was added: “In the name of God, there is no God but Allah, and Muhammad is His messenger.”

The Justinian II Solidus

The envoys explained to Justinian that Abd al-Malik was forced to do this because the Umayyad Caliphate was constantly facing religious and political difficulties resulting from their governance over greatly enlarged territories. Justinian had a legitimate concern about the potential for the debasement of these new coins from the caliphate, which were minted outside of Justinian’s control and high standards. This would

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BAD MONEY: A VERY BLOODY HISTORY

If the solidus was a superior quality coin, why did it lose value? Because with the Byzantine Empire gone, there was a concern that such coins would no longer be accepted. Acceptance is an incredibly important property of money.

Justinian’s “good money” policy approach was actually correct.

Fighting for what was right cost him his empire and his life.

expose the Byzantine Empire to the terrible side-effects of Gresham’s Law. The introduction of Arabic as their official language complicated matters.

Justinian II flatly refused to accept such coins and demanded payment of tribute in old-style solidi. Refusal of tribute violated the agreement of 689. After unsuccessful negotiations, an armed conflict erupted, culminating in a battle at Sebastopolis (modern-day Sulusaray in Turkey). Justinian’s forces lost, and the resulting sharp depreciation of the Byzantine currency exchange rate caused upheaval throughout the Byzantine Empire.

People placed the blame squarely on Justinian II. Taxpayers revolted.

In the Byzantine Empire, burning in a copper bull was a gruesome form of execution reserved for individuals deemed enemies of the state or those accused of severe crimes. The copper bull itself was a large, metal structure designed in the shape of a bull. It had a door or hatch that could be opened and closed, allowing the victim to be placed inside.

Once the person was enclosed within the bull, a fire would be lit beneath it, slowly heating the metal, and causing it to reach scorching temperatures.

The condemned individual would experience intense heat and suffocating conditions within the enclosed space. The copper acted as a conductor, spreading the heat throughout the bull, and intensifying the suffering of the victim. The combination of searing heat, lack of oxygen, and confinement would lead to severe burns, asphyxiation, and ultimately, a slow and torturous death.

The purpose of this brutal execution method was not only to cause physical agony but also to serve as a deterrent, instilling fear in those who witnessed or heard about it.

This is how the financial officials associated with Justinian’s economic depression were executed.

Justinian II was punished by cutting off his nose in front of spectators at the Hippodrome. After that, he was known as–and this is not a joke–“Justinian the Slit-Nosed.”

What followed is known as The Twenty Years’ Anarchy. This was a period of chaos and turmoil that gripped the Byzantine Empire from 695 to 717 AD, characterized by a series of short-lived and often brutal reigns of various emperors, usurpers, and rebels. It was a time of political instability, social unrest, and military conflict which left the Byzantine Empire weakened and vulnerable to external threats. Emperors were frequently overthrown and executed by their own subjects, and battles were fought throughout the empire as different factions struggled for power. The chaos of the period also gave rise to the emergence of military leaders and regional strongmen, who seized control of large portions of the empire and acted as de facto rulers.

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THE DEBAUCHERY OF CURRENCY Justinian II was exiled to the island of Cherson (near presentday Sevastopol) in the Black Sea. He was eventually killed by his own soldiers, who had grown tired of his persistent attempts to regain power.

MONEY: THE CAUSE OF REVOLUTIONS, PART 2 In the mid-18th century, Britain was the world’s leading power on sea and land, with a vast empire that spanned the globe. The empire included territories in Africa, Asia, and the Americas, which were governed by the British Crown. In North America, the British Empire had 13 colonies, which were located along the eastern coast of the continent.

The colonies were established primarily for economic reasons and were a source of raw materials and a market for British goods.

Despite a relationship that was complex and fraught with tension, the colonists viewed themselves as loyal subjects of the British Crown and expected a certain amount of British government control over their affairs.

The British government had a policy of mercantilism, which aimed to increase Britain’s wealth by maximizing exports and minimizing imports. The government imposed a series of trade regulations on the colonies, which ensured that they only traded with Britain and other British colonies. The Navigation Acts, first introduced in the 1660s, were the most significant of these regulations. They required all colonial trade to be conducted on British ships and through British ports. The acts also specified which goods could be exported and which could only be sold to Britain. The British government also imposed tariffs and duties on colonial imports and exports.

The Navigation Acts effectively prohibited the import and use of foreign gold and silver in the colonies. Gold and silver were universally considered good money, and were readily available by trading with the Spanish, French, and Dutch. But for the American colonists, the only good money was British money, a convention imposed by decree, not economic practicality. This put the colonies at a significant disadvantage in procuring essentials for themselves.

The monetary policy of the British government was part of a larger effort to control the colonial economy. Before the American Revolution, the colonies did not have a uniform currency. Each colony had its own currency, and there were often multiple currencies in circulation within a single colony. This made trade between the colonies difficult, and it was also challenging for the British government to collect taxes from the colonies.

To address this issue, the British government passed the Currency Acts of 1751 and 1764. These acts prohibited the colonies from issuing their own paper currency and required them to use only British currency. The British government argued that the prohibition was

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BAD MONEY: A VERY BLOODY HISTORY

Benjamin Franklin applied his genius to early work in printing colonial paper currency designed to counter a constant threat of counterfeiting. Franklin was an early innovator of printing techniques that used colored threads, watermarks and imprints of natural objects such as leaves to make it far harder for others to create knockoffs of his paper bills. Modern versions of these countermeasures remain in use today.

necessary to prevent the colonies from destabilizing the British economy by issuing too much paper money, thereby creating inflation.

The prohibition against paper money had significant implications for the availability of credit. Before the Currency Acts, colonial governments and private businesses could issue their own paper money, which served as a form of credit. Without this option, it became much more difficult for businesses to obtain credit.

Further, the British government required the colonies to pay their taxes in British currency. The supply of British money was so tightly restricted, and trade so controlled, that many colonists simply did not have access to enough British currency to pay their debts and taxes.

This currency shortage led to a significant increase in debt and financial instability, which further exacerbated economic problems within the colonies.

Without credit, the economy could not grow. And the economic wealth that was created was sucked out of the colonies and sent back to Britain. The colonists were left with little to show for their labor and loyalty. In response, but mostly out of necessity, many colonies continued to issue their own paper money in secret, and some even went so far as to counterfeit British currency.

Against this backdrop, Parliament passed The Stamp Act of 1765—one of the most controversial and significant pieces of legislation passed in the history of the British government. The Stamp Act was a tax on printed materials, including legal documents, newspapers, and pamphlets. The tax was collected by requiring that these materials be printed on paper that had an official stamp, which had to be purchased from British authorities. The tax was designed to raise revenue for the British government, which was struggling with debt following the Seven Years’ War. The tax increased the cost of doing business in the colonies, as all printed materials had to be printed on stamped paper, which was more expensive than regular paper. The tax also harmed the printing industry, as many printers were unable to afford the expensive stamps and were forced out of business.

Britain had instituted a practice of requiring tax be paid in certain money, acceptable only to the Crown, and then implemented crippling exchange rates and fees as obstacles to obtaining that money. To the colonists, it reeked of the situation Jesus encountered at the temple. As devout Christians, the comparison was obvious. King George had made the colonies a den of thieves, and the Americans were the ones being robbed. Jesus’ reaction to this practice was angry and unforgiving; this entire system was unrighteous in the eyes of the Lord. Could the colonists be expected to behave better than Christ?

The British government eventually repealed the Stamp Act in 1766, but not before it sparked widespread protests and resistance in the

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THE DEBAUCHERY OF CURRENCY colonies. It was at this point that Benjamin Franklin spoke to Parliament about the deterioration in relations between the colonies and the homeland.

THE BEGINNING OF THE END OF AN EMPIRE, AGAIN Benjamin Franklin, who was working as a representative of the colonies of Pennsylvania, Massachusetts, New Jersey, and Georgia, addressed the House of Commons at Parliament in London. Famous even in his own time, the portly, aging man with silvery-grey hair and a ponytail stood up. Elegantly dressed, he wore a long, dark coat with a white waistcoat and a frilled shirt. His accessories included a silver-topped cane and a pair of silver shoe buckles.

A question had been asked about the colonies: “And have they not still the same respect for parliament?”

“No, it is greatly lessened,” Franklin replied.

A follow-up: “To what causes is that owing?”

Behind spectacles of his own making, his deep-set, piercing eyes surveyed the assembly of gentlemen before him. Franklin answered the question as plainly as had been asked: “To a concurrence of causes, the restraints lately laid on their trade, by which the bringing of foreign gold and silver into the colonies was prevented; the prohibition of making paper money among themselves; and then demanding a new and heavy tax by stamps; taking away, at the same time, trials by juries, and refusing to receive and hear their humble petitions.”

Ten years later, General George Washington stood on the banks of the Delaware River, staring across at the enemy lines. The night was bitterly cold, and the river was choked with ice. It was Christmas Eve, a trying four months since his army was routed at Brooklyn and narrowly escaped. The memory of the 400 selfless men from Maryland, and the others lost in that battle, shone bright in his mind as if it had happened the day before. Washington insisted his boat be the first to cross the Delaware River in what would be recorded as one of the most brilliant and daring attacks in history.

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THE DOLLAR CHAPTER 5

THE DOLLAR Money does not bring happiness, but it gives power.

A

—Darius the Great, Achaemenid Empire

ccused of espionage and sentenced to death in a closed-door trial, a language student was imprisoned and tortured for more than four years. His government had been working tirelessly to secure his release, but their efforts had been met with resistance and frustration at every turn.

In the early hours of a cold January morning, the phone rang in the office of the Secretary of State. It was a call he had been waiting for, a call that he hoped would bring an end to the long ordeal. The voice on the other end of the line was hesitant but urgent.

“Mr. Secretary, we have news. We think we may have a way to get him out.”

The news was both promising and daunting. The US government had been trying to negotiate a prisoner exchange for months. Now, it seemed, there was a glimmer of hope.

On the day of the exchange, a small private jet was chartered to transport a former US Marine and three other prisoners to Switzerland, where the exchange was to take place. Several were in poor health and weak from hunger. All had been denied proper medical care and had suffered physical and emotional abuse at the hands of their captors.

As the jet with the captives took off, each passenger felt a mix of emotions: hope, fear, and disbelief. Upon landing, they were quickly hustled into a small room in a Swiss government building. Nothing was settled yet; the proposed deal could still fail. As he sat at a table, a tap landed on his shoulder. He turned to see a US official, who whispered in his ear: “We’re going to get you out of here. Just hang tight.”

THE POTATO KING In the northwest portion of the modern-day Czech Republic is a town named Jáchymov, meaning “Saint Joachim’s Valley.” In German, it is called Joachimsthal. When silver was discovered in the area in the 16th century, it became a mining community. The silver coins were known as Joachimstalers, or thalers (pronounced “taller”) for short.

Within a generation, the silver from these mines would be used to mint Reichsthalers, which would serve as the official currency of the

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THE DEBAUCHERY OF CURRENCY Holy Roman Empire for 300 years. Its descendant, the US dollar, would later account for over 80% of all international transactions.

Count Schlick, Father of the Dollar Count Hieronymus Schlick of Bohemia was a prominent Bohemian nobleman and mining magnate during the late medieval period.

Schlick was born into a wealthy noble family in Bohemia, which was then part of the Kingdom of Bohemia and a constituent part of the Holy Roman Empire. He inherited significant estates and mines in the region and quickly became one of the wealthiest and most influential men in Bohemia.

Schlick was an avid supporter of the mining industry and worked tirelessly to improve its productivity and efficiency. He invested heavily in new mining technologies and techniques and established several new mines in the region, including the famous Joachimsthal mine, which produced the silver that was used to mint the thaler.

It was Schlick’s 1518 minting of the thaler, a large silver coin with uniform weight and high silver content, which quickly gained popularity and was widely accepted throughout Europe. The thaler had all the makings of good money: portable, divisible, durable, and scarce. Its uniformity meant it was fungible, so it quickly gained broad acceptance.

The earliest dollar, a thaler from 1518.

The thaler became so widely used that it was adopted as the official currency of many countries, including Austria, Hungary, Bohemia, and the Netherlands. The Holy Roman Empire was no exception, and the thaler became an important part of its monetary system. The widespread acceptance of the thaler as currency helped to facilitate trade and commerce across the empire, and it was used for everything from taxes to loans.

As acceptance normalized, the thaler became the coin of account for the whole Empire, meaning all goods and services were priced in thalers rather than weights of silver or gold.

In 1792, the United States adopted the dollar as its official currency, which was based on the Spanish dollar, which itself was based on the thaler.

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THE DOLLAR Frederick the Great’s action is one of the few instances where Gresham’s Law (really, its inverse, Thier’s Law) improved an economy rather than ruined it. Why? Someone close to him referred to Copernicus’ recommendations (Appendix A) which were written two hundred years earlier In fact, Thier’s Law can be traced to Copernicus’ recommendations to Prussia in 1526.

Thier’s Law: A Variation of Gresham’s Law Before there was Satoshi Nakamoto and Bitcoin, there was Frederick the Great and the thaler. Frederick II was Prussia’s king from 1740 to 1786. His policies embodied benevolent despotism and promoted religious tolerance, free speech, public education, and economic growth and stability.

Frederick reigned during a time of global war which lasted from 1754-1763. This war, known as the Seven Years’ War, spanned five continents and involved at least eight major belligerents. In the American Colonies, this manifested as the French and Indian War. This is the same war that caused Britain to tax the American Colonies so heavily, resulting in the American Revolution.

The Seven Years’ War, like World Wars I and II that followed it, left participant countries economically weakened. A financial crisis was the result. As with the Roman Empire, and so many other empires since, the governments of Europe knew of only one solution to pay wartime debts: debase the currency.

The circulation of depreciated money throughout Prussia and other countries kept prices high. To revalue the thaler, Frederick issued the Mint Edict of May 1763. For the payment of taxes, the directive set fixed rates of newer, depreciated coins to those of pre-war coins, effectively reversing the impacts of inflation. Frederick also withdrew some of the depreciated money from circulation and ordered the minting of new thalers at a specified ratio to silver. Many other European rulers mimicked Frederick in reforming their own currencies, which resulted in a shortage of hard currency. Demand for good money rose, and demand for depreciated coins fell, almost overnight. Currency speculators and unscrupulous merchants lost much, but overall, hyperinflation was averted, saving 18th-century Europe from post-war economic doom. It was a valuable economic lesson that was quickly forgotten.

Frederick the Great’s monetary policy was bold, thoughtful, and progressive despite being 200 years old. By removing junk money from the economy and replacing it with something of value, he was able to stabilize prices. This action would become known as Thier’s Law, even though Thier himself wouldn’t be born for another 30 years.

By fixing rates to pre-war levels, Frederick was able to ensure demand for good money. The implementation was heavy-handed. One could say he “ripped off the band-aid” and acted without much concern for negative consequences. Such is the nature of dictatorships. But the policy itself was sound, needed, and effective.

Good Money Drives Out Bad If there is no fixed exchange rate in a multi-currency system, then Gresham’s Law works in reverse. If given the choice of what money to accept, people will accept the money they believe to be of the highest 57

THE DEBAUCHERY OF CURRENCY long-term value, and not accept what they believe to be of low long-term value. If not given the choice and required to accept all money, good and bad, they will tend to keep the money of greater perceived value in their possession and pass the bad money to others.

Strong currencies, meaning ones that retained their precious metal value over long periods, tended to dominate and drive out weak (that is, less reputable) ones. The florins and ducats of the Italian city-states were widely accepted. Likewise, the thaler became dominant in Europe centuries later. The increased acceptance and circulation were not because they were bad coins. It is because they were among the best coins ever made, and there were no artificial constraints on their exchange value.

A good example of Thier’s Law in action is the case of com- Thier’s Law is modity money versus representative money. When commodity money why people save, and fiat money are both accepted in a market, people will tend to hoard rather than spend, the commodity money while using the fiat money for transactions: in Bitcoin. other words, paper money is for spending and gold money is for saving.

This is because commodity money is more valuable and is less subject to inflation, while fiat money is less valuable and can lose its purchasing power over time.

In modern times, Thier’s Law has relevance to cryptocurrency, where the value of different digital currencies can fluctuate widely. In this case, people may be more likely to adopt the cryptocurrency that is more valuable (meaning it is more widely accepted). This can lead to a situation where the less valuable cryptocurrency becomes a day-traded gambling instrument, held for short periods and valued only for its ability to generate quick profits. Meanwhile, the more valuable cryptocurrency is hoarded and increases further in value.

Artificial Scarcity Frederick the Great is known as the Potato King. As the peasants of wartime Prussia starved, Frederick saw an opportunity in the humble but nutritious South American potato. He directed, via an order dated 24 March 1756, that the country should cultivate and distribute potatoes as protection against famine. There was one problem: at that time, people hated potatoes.

The potato was regarded as a garbage plant. It was a food not mentioned in the Bible and therefore must be something shunned by the Almighty Himself. The leafy greens that sprouted from it were poisonous, serving as proof that the vegetable was the work of Satan. In response to Frederick’s directive, the town of Kolberg officially replied to Frederick: “The things [potatoes] have neither smell nor taste, not even the dogs will eat them, so what use are they to us?”

Crafty Frederick planted his own potato fields outside Berlin, complete with fencing and signage that indicated they were the “Royal

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Acceptance is a crucial requirement for success, whether it is currency or other networks.

Potato Fields.” Next, he directed soldiers to protect the potatoes from theft, and they stood watch day and night. The gardening and guarding of potatoes took place with a perplexing combination of conspicuous drama and secrecy. The fanfare surrounding the cultivation of these potatoes made it seem as if it was valuable treasury buried there, not some second-rate plant.

The secret, however, was that Frederick had instructed his guards to not be too diligent in their work. They were ordered to take frequent naps and accept bribes; to not show up to work some days; and to be the worst potato guards ever. Of course, the villagers were quite successful in stealing the “royal potatoes” for planting in their own gardens. Like a virus, the hated-but-loved potato spread throughout Prussia.

Frederick’s goal was not to make the potato rare and valuable.

Rather, it was quite the opposite: he wanted the potato to be more accepted. Frederick’s reverse psychology is one of the earliest instances of wildly successful artificial scarcity. More than two centuries later, the potato is synonymous with German and Eastern European cuisine.

AMERICA: THE LAND OF FINANCIAL PANICS Europe is not the only continent to experience repeated distress in its monetary system. The US excels at producing financial panics and banking crises. For a country so awash with natural wealth, this seems difficult to understand. However, the causes of these crises can usually be traced to bad monetary and economic policy and a schizophrenic regulatory regime.

The Crime of ‘73 What does Gresham’s law tell us will happen when one type of coin has more intrinsic value than another? The ‘bad’ money (silver in this case) gets spent and circulated more, while the ‘good’ money gets hoarded.

This is the exact opposite of what the Mint Act was designed to achieve!

The Coinage Act of 1873, also known as the “Crime of ‘73,” was a controversial law that fundamentally changed the monetary system of the United States. While some called it a necessary modernization of the currency, others saw it as a betrayal of the silver-mining interests of the Western United States.

This new system was a significant departure from previous monetary policy. Passed by Congress on February 12, 1873, the Act eliminated the silver dollar as a unit of account and replaced it with the gold dollar. The Act also discontinued the minting of silver coins in denominations other than one dollar. However, even those were only to be minted in limited quantities.

The Act, also known as the Mint Act, effectively ended the bimetallic standard which had been in place in the United States since the country’s founding. The bimetallic standard allowed for the use of both gold and silver as currency, with the value of each metal being set by the government. The government had established a ratio between the two

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THE DEBAUCHERY OF CURRENCY metals, with one ounce of gold being equal to 16 ounces of silver. This ratio was known as the mint ratio. 26 However, the ratio between the value of gold and silver in the open market fluctuated, and as a result, the market value of silver was often lower than its mint ratio value. This led to silver being undervalued and gold being overvalued.

The Act essentially ended the right and practice of holders of This is the heysilver bullion to have their metals coined into standard silver dollars, ef- day of the Amerifectively ending the use of silver as currency. The silver-mining industry can West with in the Western United States suffered. Holders of gold, however, could stagecoach, train, continue to have their bullion made into money. On top of that, the Act and bank robberies so comalso allowed for the redemption of paper currency in gold. mon they are The Coinage Act of 1873 was so hated that it led to the creation now ingrained in of a new political party, the Populist Party. The Populists were a coalition American lore. of farmers, laborers, and small business owners who opposed the Act Such crimes helped to cement and sought to represent the interests of the common people against the the image of the wealthy elites. The Populists were particularly vocal in their opposition outlaw bandit in to the gold standard, which they saw as a tool of the wealthy that hurt American popular culture and inthe poor.

Around this time, the American West was growing at a remark- spired numerous books, movies, able pace. The transcontinental railroad had been completed just four and television years earlier. Towns popped up so quickly that conventionally named shows. streets were now identified with just numbers and letters. Mortgages and bank lending soared in the west, and some of that was driven by significant mining booms in Nevada (Comstock Lode, 1859-1878), Colorado (Leadville, 1879-1893), and South Dakota (Black Hills, 1874-1877).

The Act also had an impact on the availability of credit, as banks were required to hold a certain amount of gold reserves to back their Between 1870 paper currency. Without gold in the vault, it was difficult for banks to and 1884, there were 347 atlend money, which had an impact on the broader economy. With bank- tempted and acing and bank deposits growing, frontier banks were forced to acquire tual stagecoach gold from the east coast as well as regional mine sites, hence the large robberies. This number of trains and wagons carrying gold from place to place in the led the company to send armed American West. guards with their The move toward a gold standard also led to deflation, as the stages, a security supply of money decreased while the demand for goods and services re- force most wellmained relatively constant. This caused prices to fall, which hurt farmers known for wielding their double and other producers who relied on high prices to make a profit. barrel shotguns.

These guards were known as “shotgun messengers” and is the source of the phrase “riding shotgun.”

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US Train Robberies, adapted from “Train Robbery: A Retrospective Look at an Obsolete Crime.”

Free Silver The unintended consequence of the Coinage Act was to shrink the money supply precisely at a time when the economy was growing.

The quantity of money in an economy must match the size of that economy. If the economy grows, the money supply must expand.

Free Silver was a late 19th-century political movement that advocated for the unrestricted coinage of silver as a means of expanding the money supply and stimulating economic growth. It was a direct response to the disastrous consequences of the Coinage Act of 1873.

With the value of the dollar fixed to gold, the government could only print or coin as much currency as it had in gold reserves. This led to an insufficient supply of money, which made it difficult for farmers, workers, and other Americans to pay off their debts and invest in their businesses.

The Free Silver movement sought to restore unrestricted coinage of silver to gold at the old ratio of 16:1. This would effectively double the money supply and make it easier for people to borrow, invest, and spend. Supporters of Free Silver included the farmers, debtors, and silver miners, who were victimized by the 1873 Act and stood to benefit from an increase in the value of their silver reserves.

The movement succeeded, and the Sherman Silver Purchase Act of 1890 required the US government to buy large amounts of silver each month to be minted into coins. This led to a glut of silver on the market and a decline in its value relative to gold.

Once more, Gresham’s Law played a significant role. With gold increasing relative to silver, but coins being minted in both metals, people would spend silver and hoard gold, yet again. Thus, the original problem wasn’t solved, it was exacerbated. The difference is that silver is once again legal tender. Because silver was worth less than its legal equivalent in gold, citizens paid their government taxes in silver, while international creditors demanded payment in gold. The US Treasury now had a steady increase in silver coins, which went back into circulation, and a steady outflow of gold.

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THE DEBAUCHERY OF CURRENCY Depositors began withdrawing their funds from banks and hoarding gold coins. This led to a run on gold reserves at the US Treasury and a depletion of the nation’s gold supply. With bank deposits fleeing at a rapid pace, banks began to fail. Word spread, resulting in more bank runs. This, in turn, contributed to a liquidity crisis—insufficient availability of money to support economic activity. That led to the failure of businesses, which in turn led to widespread unemployment.

The period from 1893 to 1897 was the worst economic downturn in the United States up until that point. The cycle of institutional economic failure was so persistent it became known as the Long Depression.

The Two Clevelands The response to the crisis was slow yet predictable: borrow money. President Grover Cleveland authorized the issuance of bonds and borrowed $65 million in gold from J.P. Morgan and other bankers.

It also set a dangerous precedent for the government’s reliance on private lenders to prop up the economy. President Cleveland also pushed for a repeal of the Sherman Silver Purchase Act. In 1890, Leon F. Czolgosz moved to Cleveland, Ohio, where he found employment at the Cleveland Rolling Mill Company. After the economic crash of 1893, the mill closed for some time. Under conditions of great economic distress, other companies were closing down or at least reducing wages. Many workers went on strike as work conditions deteriorated. Unemployment was at about 12 percent. Czolgosz viewed himself as a personal victim of bad economic policy and joined a fringe socialist group where he became interested in anarchism.

In 1896, William McKinley was elected President. McKinley campaigned on a platform of returning the country to the gold standard, which was seen as a way to restore confidence in the economy. In 1901, McKinley was assassinated by Czolgosz who had been radicalized to believe that the government and capitalism were the source of society’s problems. Ironically the Sherman Silver Purchase Act–the main cause of the economic turmoil– had been repealed in 1893, the same year Czolgosz lost his job. It was too little, too late.

The Panic of 1907 By 1900, the United States formally adopted the gold standard, which remained in place until the 1930s. The move to a gold standard was seen as a way to stabilize the country’s currency and prevent inflation. However, the gold standard also had drawbacks, including a limited money supply and a lack of flexibility in responding to economic downturns. The gold standard was eventually abandoned during the Great Depression, as the government sought to increase the money supply and

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Bad money drives out good, again.

The fundamental problem was not whether gold or silver made better money. It was the artificial pricing ratio of 16:1.

This is the exact same problem that plagued Queen Elizabeth I. However, we shouldn’t expect the Americans of that time to give a care about what the English did about it.

Oh wait, the English didn’t fix their problem either.

Throughout history, there is only one economic solution that governments know: borrow money.

Repayment, frequently in blood, will be somebody else’s problem well into the future.

Note the many years between adverse policy action and political and social consequences. This is typical.

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Years earlier, the country had implemented good money via the gold standard. So why the failures?

Because it takes more than just good money to maintain a healthy economy.

stimulate the economy. But otherwise, the period at the turn of the century was relatively prosperous.

Gold money brought stability and growth to the US economy.

The growth experienced at the turn of the century led to over-speculation in the stock market. In the years leading up to the panic, investors had been pouring money into the stock market in anticipation of the booming economy. However, this optimism was not supported by actual economic growth, and many stocks were overvalued. As a result, when the bubble burst, the value of many stocks plummeted, causing panic among investors and leading to a widespread sell-off.

In the early 1900s, there were no federal banking regulations, and banks were free to operate as they pleased. This led to a lack of transparency and accountability, with many banks engaging in risky lending practices and investing in speculative ventures. As investments failed, so did banks, leading to a new series of bank runs.

The panic itself began on October 16, 1907, when the stock market experienced a sharp decline. Just eight days later, the Knickerbocker Trust Company failed. The company’s president, Charles Barney, killed himself with a pistol three weeks later. That such a large and established financial institution could fail so quickly was seen as a sign that the entire banking system was in danger of collapsing—an essentially true assessment.

As investors began to lose confidence in the banking system, they rushed to withdraw their deposits, leading to a shortage of cash reserves and a further decline in the value of stocks and bonds. Like so many times in the past, this cycle of bank failures and runs only served to further undermine the already shaky financial system.

In the face of this mounting crisis, the US government was powerless to intervene, as there were no mechanisms in place to regulate the banking system or to provide a bailout to troubled banks. As the crisis deepened, it became clear that a solution would have to be found quickly if the US economy was to avoid a catastrophic collapse.

Fortunately, a group of powerful bankers, led by J.P. Morgan, stepped in to provide a solution. Morgan, who was one of the wealthiest and most powerful men in the country, recognized the severity of the crisis and knew that something needed to be done to stabilize the financial system. He organized a consortium of bankers, who pooled their resources and began buying up the troubled assets of the failing banks and trust companies.

This intervention had a profound impact on the financial system, as it helped to stabilize the banking system and prevent a complete collapse of the economy. This led to a growing movement for greater government regulation of the financial system, which eventually resulted in the creation of numerous new laws and regulations aimed at

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THE DEBAUCHERY OF CURRENCY preventing future financial crises. Out of the 1907 Panic, the Federal Reserve was born.

The Federal Reserve In 1908, Congress established the National Monetary Commis- To this day, the sion, which was charged with studying the banking system and making Federal Reserve is recommendations for reform. The National Monetary Commission was not a democratic led by Senator Nelson Aldrich of Rhode Island, a powerful Republican institution. Its policy-making who was closely connected to the banking industry. Aldrich was widely members are poregarded as the leader of the commission, and his views on banking re- litical appointees.

They govern by form were heavily influenced by the big Wall Street banks.

In 1910, Aldrich organized a meeting at a remote hunting lodge committee.

Meetings are held on Jekyll Island, off the coast of Georgia. The meeting was held in com- in secret. plete cloak-and-dagger secrecy, with the attendees using assumed names and traveling to the island separately to avoid arousing suspicion. The participants included some of the most influential bankers and financiers of the time, including J.P. Morgan, Paul Warburg, and Frank Vanderlip.

Also present were two prominent economists, Henry P. Davison, and A. Piatt Andrew. They spent nine days on the island, drafting a plan that would address the causes of the 1907 panic.

The blueprint developed at the meeting called for the establishment of a new central banking system, with a Board of Governors appointed by the President of the United States. The board would be responsible for overseeing the operations of the Federal Reserve Banks, which would be established in major cities throughout the country. The regional banks would be owned by the member banks in each region, and they would be responsible for providing loans and managing the money supply in their respective regions.

The Jekyll Island plan formed the basis for the Federal Reserve Act, which was passed by Congress in 1913. The Act established the Federal Reserve System as the central banking system of the United States, with the power to regulate the supply of money and credit in the economy.

Under the Federal Reserve Act, the Federal Reserve System was structured to appear as a decentralized network of regional banks that were owned by the member banks in each region. However, the Federal Reserve Board–based in Washington, D.C.–was responsible for overseeing the entire system and setting monetary policy.

The Federal Reserve System was designed to be a lender of last resort, which means that it was responsible for providing liquidity to the banking system in times of crisis. The system was also responsible for regulating the money supply and managing interest rates to promote economic stability and growth.

In the years following the establishment of the Federal Reserve System, the US economy experienced significant growth and expansion.

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THE DOLLAR The Fed played a key role in stabilizing the banking system and providing liquidity during the financial panics of the 1920s and 1930s.

HOW THE DOLLAR REPLACED GOLD By now you should see a recurring problem.

Money that is not backed by gold loses value.

Money that is backed by gold is constrained by supply, and that limits economic growth.

To boost economic growth, countries borrow money and/or go to war. To pay the debt, they debase the currency.

Economic crisis results, and the whole scheme collapses.

Economic reform serves as the rallying cry for political revolution, and the monetary network is retooled.

The First World War caused many belligerent countries to abandon the gold standard. There was simply not enough gold in their treasuries to pay for a war that they were legally obligated by treaty to undertake. Inspired by Barbon’s paper notes centuries before, money was simply printed without any backing by gold or silver.

The First World War, like the Seven Years’ War, left European countries economically wounded and financially unstable. And just like the Seven Years’ War, governments resorted to the same solution: debase the currency to pay the debt. Currency debasement with paper money takes the form of simply printing more money (or increasing lending, which has the same effect). When more money chases after fewer goods, the result is always inflation.

Hyperinflation Inflation was already a problem before the war, but the need to fund the war resulted in an exponential increase in government spending.

Governments needed to finance the war effort, and they turned to their central banks to print more money. This led to an increase in the money supply, which in turn led to inflation. The situation worsened as the war progressed.

One of the countries hardest hit by hyperinflation was Germany, which had borrowed heavily to finance its war effort. The government turned to printing more and more money to meet its debt obligations, leading to a rapid devaluation of the currency.

Germany had gone off the gold standard in 1914, and by the end of the war, its gold reserves were depleted. The German mark lost its value rapidly, and by 1918, it was almost worthless. As the war came to an end, Germany found itself in a dire economic situation with its factories and infrastructure destroyed and its citizens suffering from hunger and poverty. On top of this, the 1919 Treaty of Versailles placed heavy reparations on Germany. This forced the Reichsbank to issue massive quantities of Reichsmarks which it used to purchase foreign currency to make reparations.

By 1923, the German mark had lost almost all its value, with prices doubling every few days. People were paid multiple times a day so they could rush to the shops to buy necessities before prices rose again.

Farmers refused to sell their crops as they were worth more as firewood than the paper money they were being paid with. Hyperinflation had created chaos in Germany, with many citizens losing their life savings, pensions, and livelihoods. The German middle class was destroyed.

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Charts like this can be confusing.

Another way of viewing it is to ask, “How much gold (or food, or medicine) can a Reichsmark buy?”

And then you flip the chart upside down for the answer.

Value of one gold mark in paper marks.

Other countries were not immune to hyperinflation either. Hungary, Austria, and Poland all experienced hyperinflation following the war, though to a lesser degree than Germany. In Hungary, hyperinflation reached a peak in 1924, with prices increasing by 5,000% per month. In Austria, the shilling was devalued by 90% within a year of the end of the war.

This first widespread attempt at abandoning gold was by all measures a failure. The result in most countries was rampant inflation.

Prices doubled in the US and Britain, tripled in France, and quadrupled in Italy.

The US did not suspend the gold standard during the war. Far from the battlefield, the US entered the war late and provided a comparatively small military force. However, the US economic contribution to the war was a net positive. Protected by two oceans, America did not suffer the physical loss of production facilities. It was able to provide financing, goods, and equipment to allies. The newly created Federal Reserve intervened in currency markets and sold bonds to offset some

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THE DOLLAR of the gold imports that would have otherwise increased the money supply.

“Berlin, Germany-- Inflation: A man sweeping worthless marks into a pile on a Berlin street in 1923.” — Margaret Bourke-White

By 1927 many countries had returned to the gold standard.

However, because of World War I, the United States had moved from being a net debtor country to being a net creditor. From 1915 to 1935, the United States tripled its gold reserves. So large were the US post-war holdings of gold that in 1935 it rushed to build a secure vault in Kentucky, a gold depository on the grounds of an army base called Fort Knox.

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THE DEBAUCHERY OF CURRENCY This financial security, along with the large and increasing supply of gold it held in reserves, would prove vital to shaping the world into the 21st century.

Bretton Woods After World War II, the United States had the only functioning economy of any meaningful size in the world. The victor of essentially two world wars, the US crafted the global economy as it exists today.

The rules for how that economy would operate, and how the monetary system that facilitated it would be managed, were laid out at a conference Another secret of 44 countries in Bretton Woods, New Hampshire. meeting about The Bretton Woods system was a significant departure from the how money gold standard, which had been in place since the 19th century. Under the should work. gold standard, currencies were directly pegged to gold, and there was no intermediary like the US dollar. Under the Bretton Woods system, countries fixed their exchange rates to the US dollar, which was in turn fixed to gold at a rate of $35 per ounce. This meant that countries could exchange their dollars for gold at this rate, which gave the US dollar a stable value.

Under the Bretton Woods system, the US dollar became the world’s reserve currency because it was backed by gold and the US economy was the strongest in the world. This meant that other countries would hold large reserves of US dollars, which they could use to settle international transactions.

American materials would be shipped overseas and paid for in dollars, ensuring both employment for Americans and an immediate demand for dollars. Reconstruction loans made to countries would have to be paid in dollars, ensuring a steady demand for dollars for decades.

The US dollar also became the primary currency for trading commodities like oil, which helped cement its status as the world’s reserve currency. This allowed the United States to maintain a dominant position in the global economy, as it could control the supply of dollars and influence the policies of other countries.

The Allies were in such shambles they had no choice but to ac- Monetary reform cept the terms of Bretton Woods. Only the Soviets refused, a decision and political revolution are often which would cost them their country 45 years later. seen together.

With the Bretton Woods agreement in place, the United States: Sometimes the re  



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controlled two-thirds of the world’s gold supply; produced 80% of the world’s food supply; controlled each of the world’s seafaring chokepoints with its navy; and was a creditor to nearly every WWII participant, including Germany and Japan which had lost the war.

This ensured a strong demand for dollars for debt repayment from friendly countries.

form causes the revolution, and sometimes the revolution institutes reform.

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The US Leaves the Gold Standard

To combat the effects of Gresham’s Law, governments resorted to force.

The Continental Congress resolved in 1775 to treat any person refusing to accept irredeemable continental bills at their face value as “an enemy of this country.” The French Revolutionary government similarly imposed a death sentence on persons caught discounting assignats relative to coins bearing the same face value.

The history of paper money is the history of monetary failures.

In the late 1500s, Spain issued vales which were supposed to be backed by the silver reserves in the Royal Treasury. They weren’t, and their value rapidly decreased, leading to hyperinflation and the collapse of the Spanish economy.

In the mid-1600s, Sweden introduced paper money to help finance its military campaigns. The notes were initially backed by copper, but as the cost of copper rose, the notes lost their value. In 1667, the Swedish government was forced to devalue the currency by 25%, and by 1682, the notes had lost almost all their value.

In 1789, the French government introduced paper money called Assignats to finance the French Revolution. The notes were initially backed by confiscated church property, but as the government continued to print more Assignats to finance its spending, inflation skyrocketed. By 1796, the Assignat had lost almost all its value, and the French government was forced to abandon the currency.

In the late 16th century, the Ming Dynasty in China began issuing paper money to replace copper coins. However, the government issued more paper money than it could back with commodity money, leading to inflation and a loss of confidence in the currency. By the mid-17th century, the currency had lost almost all its value, and China reverted back to using coins. This is the same Ming Dynasty, you will recall, that had overthrown and tortured the Yuan Dynasty for ruining the economy through paper money inflation.

In 1690, the Massachusetts Bay Colony began issuing paper money to finance the cost of war against the French and Native Americans. However, the notes quickly lost their value due to counterfeiting and overprinting, and the colony was forced to issue new notes with higher denominations. By 1749, the notes had lost almost all their value, and Massachusetts abandoned paper money.

During the American Revolution, the Continental Congress issued paper money known as Continental currency to finance the war effort. However, due to the lack of backing by gold or silver and overprinting, the value of the Continental currency declined rapidly, leading to hyperinflation and the phrase “not worth a Continental.”

In the late 1700s, the Russian government issued paper money known as rubles to pay for its wars with the Ottoman Empire. However, the ruble was not backed by gold or silver, and the government overprinted the currency, leading to hyperinflation and a loss of confidence in the currency.

Given the history of paper money, and the disastrous experiment with paper money in Europe after World War I, the US’ decision to leave the gold standard and print paper money backed by faith seems perplexing if not foolish.

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THE DEBAUCHERY OF CURRENCY The Bretton Woods agreement of 1944 created a new international monetary system, which established the US dollar as the world’s reserve currency and tied the value of other currencies to the US dollar.

This system worked well in the post-war period, as the US economy was strong, and the dollar was seen as a stable and reliable currency.

However, by 1970, the US economy had begun to experience the effects of certain strains on its economy. Paradoxically, the same factors that helped the US win World War II and maintain the resulting Pax Americana are the same factors that caused the problems with the gold standard.

The first factor was the trade deficit. As the world’s strongest post-war economy, the US began exporting food and other goods to other countries, far more than it imported. These countries had to acquire dollars to purchase the goods, which meant the US had to print more dollars to sell to other nations. But the total amount of dollars to be printed could potentially exceed the value of the gold reserves in the US Treasury. Having a globally dominant currency meant that the issuer would have to have enough gold in the vault to represent a vast and growing amount of international trade. This was impractical.

Second, the baby boom meant more people entering the workforce and more consumers. The first boomers began to enter the workforce in the 1960s, and by the 1970s that workforce would swell even more. A larger population needed to be paid and also needed access to money to pay for goods and services domestically. This increased the demand for dollars, and that demand could not be met if the value of the dollar was pegged to gold.

In 1971, President Richard Nixon announced that the US would no longer convert dollars into gold. This effectively ended the gold standard and allowed the US government to print more money to finance its spending.

Leaving the gold standard gave the US government greater flexibility in monetary policy. Without the constraints of the gold standard, the US government could print more money to meet the demand of international trade and a growing population at home. Additionally, leaving the gold standard allowed the US government to finance its spending without having to worry about the value of the dollar.

WTF Happened in 1971?

There is a popular website called “WTF Happened in 1971?”

This website seeks to explore the economic, social, and technological changes that have occurred since the United States went off the gold standard in 1971. The site argues that the decision to abandon the gold standard marked a turning point in global economic history and that many of the problems and inequalities facing the world today can be

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THE DOLLAR traced back to the policies and systems put in place in the aftermath of this event.

One of the central arguments of the website is that the post1971 era has been marked by a profound increase in economic inequality.

The site provides a range of charts and graphs to support this argument, showing, for example, that the share of wealth held by the top 1% of earners in the United States has more than doubled since the 1970s, while the share held by the bottom 50% has fallen sharply.

The site also argues that the post-1971 era has been marked by a proliferation of debt and asset bubbles. It provides data on the rise of household debt in the United States and other countries, as well as the growth of various financial markets and the emergence of new forms of investment, such as exchange-traded funds (ETFs) and cryptocurrencies.

The site suggests that these developments have led to a situation in which many people are living on borrowed money and that the risks associated with these debts and investments are not being adequately managed or understood.

There is a strong case to be made that abandoning the gold standard brought about significant economic change, and likely it was change for the worse. But there is an equally strong case that the catalyst for that change was fundamentally demographic, driven by baby boomers entering the workforce and increasing economic output and consumption.

Petrodollars The Yom Kippur War, also known as the October War, was a military conflict that took place in 1973 between Israel and a coalition of Arab states led by Egypt and Syria. The war was the result of a longstanding conflict between Israel and the Arab states over control of the land of Palestine. In 1967, Israel had defeated Egypt, Syria, and Jordan in the Six-Day War and occupied the Sinai Peninsula, the West Bank, and the Golan Heights. The Arab states sought to regain control of these territories, which they considered to be occupied Palestinian lands.

On October 6, 1973–the Jewish holiday of Yom Kippur–the Arab coalition launched a surprise attack on Israel, crossing the Suez Canal and attacking Israeli forces in the Sinai Peninsula. At the same time, Syrian forces attacked Israeli positions in the Golan Heights. The Arab forces initially made significant gains but were eventually repelled by the Israeli Defense Forces (IDF) after several weeks of intense fighting.

The Arab states, led by Saudi Arabia, imposed an oil embargo on the United States and other countries that supported Israel. The embargo began on October 17, 1973, when the Organization of Arab Petroleum Exporting Countries (OAPEC) announced that it would cut oil exports by 5% every month until the US and other Western countries changed their stance on the Arab-Israeli conflict. The embargo caused a

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THE DEBAUCHERY OF CURRENCY sharp increase in oil prices and a decrease in supply, leading to a global economic recession. This led to a significant increase in oil prices and a global energy crisis that lasted for several years.

In 1973 the United States was already facing a serious economic crisis. High levels of inflation, rising trade deficits, and a declining stock market had left the country in a precarious position. At the same time, the United States was heavily reliant on foreign oil imports. The effects of the embargo on the United States were significant. Oil prices increased dramatically, causing long lines at gas stations and rationing of gasoline.

The price of gasoline increased from 38 cents per gallon to over one dollar per gallon. Many businesses were forced to close due to high energy costs, and the economy fell into a recession.

The embargo also had significant geopolitical consequences. It demonstrated the power of oil-producing nations to exert economic pressure on the world stage and led to a shift in power away from the United States and towards the Middle East. The embargo led to an increase in oil prices, and a decrease in the value of the US dollar, as many oil-producing nations began to demand payment in other currencies.

To end the embargo, the US made a deal with Saudi Arabia, the world’s largest oil exporter, which agreed to sell its oil only in US dollars.

This deal ensured that the US dollar became the currency for trading and pricing oil.

WHY THE DOLLAR HAS VALUE In July 1974, Americans met with the Saudi King in an attempt to neutralize crude oil as an economic weapon and find a way to persuade a hostile kingdom to use its oil wealth to finance America’s widening deficit. Failure to negotiate an agreement would jeopardize America’s financial health; at least a part of American military and economic strength and independence would be tied up in the hands of OPEC. The basic agreement was simple. The U.S. would buy oil from Saudi Arabia and also provide military aid and equipment. In return, the Saudis would plow billions of their oil revenue back into U.S. Treasury securities. This arrangement would help continue to finance America’s spending. The last half of the agreement–that Saudi Arabia would lend the dollars it received back to the U.S. government–was kept a secret for over 40 years.

Saudi Arabia benefitted because it would ensure that it would receive a stable and reliable stream of income that would be less susceptible to fluctuations in currency values. This also meant that any country that wanted to buy Saudi oil had to first acquire US dollars, as no other currency was accepted. As a result, the demand for US dollars increased, and the dollar became the dominant currency for international trade and finance.

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More secret dealings relating to the US monetary system.

THE DOLLAR

This strong, constant demand for dollars keeps the price of a dollar at a premium relative to most other currencies.

The dollar is the de facto global currency. If the dollar-oil relationship ceases, the dollar loses its appeal to foreign countries and American economic power is substantially weakened. This is one reason why countries like Russia and China are seeking to buy and sell oil with currencies other than the dollar.

Oil is a vital resource that powers the global economy, and is used in numerous industries including transportation, manufacturing, and electricity generation. As a result, every country in the world requires oil to varying degrees, either as an input to its production processes or as a final product consumed by its citizens.

In 2019, the world consumed about 100 million barrels of oil per day (bpd). At the height of the 2020 COVID-19 crisis, the world was in lockdown. Only essential services were operating, and travel was restricted. Short-term oil demand dropped so much that oil futures–the prices paid for oil for delivery in the near term–were negative. However, oil consumption (that which was used while the world was essentially on life support) only dropped to 80 million bpd. In other words, only 20% of oil consumption is discretionary. The rest is what is necessary to power homes, hospitals, and ship food and other items from source to consumer.

Every country needs oil, and a significant amount at that, to survive. Therefore, every country must hold significant dollars to survive.

A perpetual demand for the US dollar means that the US could print more dollars without causing inflation. Second, it gave the US control over the global financial system, as other countries were forced to hold large amounts of US dollars to buy oil.

The deal also had significant implications for other oil-producing countries. They too were forced to price their oil in US dollars if they wanted to sell it internationally. This meant that the US could exert significant control over any oil-exporting country.

The use of the US dollar as the currency for trading and pricing oil became known as the petrodollar system. This system had a profound impact on the global economy, as it allowed the US to finance its deficits by printing more dollars, without causing excessive inflation.

The US dollar’s dominance in oil trade was also supported by the US military, and in particular, the US Navy. The US Navy is by far the largest and most powerful in the world, a consequence of World War II. This navy was the muscle that moved massive shipments of materiel to Europe and successfully engaged in fierce, competitive combat in the Pacific.

Naval global chokepoints are strategic waterways around the world that are critical to global trade and commerce, particularly for the transport of oil and other resources. These chokepoints are often narrow passages between land masses or islands, making them vulnerable to blockades or disruption of traffic. Seven key chokepoints include the Strait of Hormuz, Suez Canal, Strait of Malacca, Bab el-Mandeb, Panama Canal, Turkish Straits, and Strait of Gibraltar. Whoever controls these chokepoints controls the world, because every country on earth needs oil, and that oil is transported via shipping lanes through these chokepoints. The US Navy plays a vital role in policing these chokepoints and

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THE DEBAUCHERY OF CURRENCY ensuring the continuity of global trade, including shipments of oil to destinations around the world.

The US dollar became the currency for trading and pricing oil Legally, the dollar due to a combination of historical events, economic factors, and political is secured by the decisions. The agreement with Saudi Arabia in the 1970s, the Bretton “full faith and Woods Agreement, the US military presence in the Middle East, and the credit of the United States.” global financial system all contributed to the dollar’s dominance in the This means that oil trade. Today, the US dollar remains the dominant currency in inter- claimants have renational trade and finance. Despite ongoing attacks on the dollar by as- course to a legal piring geopolitical powers, its role in the oil trade is likely to continue for system that can enforce the dolthe foreseeable future. lar’s use and com-

Seigniorage

pel acceptance as currency.

Seigniorage is a term used to describe the profit that a govern- Economically, dement makes by producing and issuing currency. The term comes from mand is what the French word seigneur, which means “lord” or “sovereign,” and refers gives a currency its value. Acto the right of a sovereign to issue currency. Direct seigniorage is the ceptance is the difference between the cost of producing currency and the face value of most important that currency. Indirect seigniorage describes an economic benefit that property of accrues to the government through the issuance of currency. For exam- money. ple, seigniorage can be the number of goods or services a government can acquire through the printing of new notes.

The concept of seigniorage has been around for centuries and Governments was initially used by European monarchs to finance their wars and other can earn a signifiendeavors. In the Middle Ages, monarchs would mint coins from pre- cant amount of cious metals and collect a fee, or seigniorage, for each coin produced. seigniorage by This fee would help finance the cost of producing the coins and provide producing and issuing physical additional revenue for the monarch. Today, governments around the money. This world use seigniorage as a way to finance their operations and fund pub- means governments have a lic services.

In the case of physical money, the cost of producing the cur- near-term incentive to debase rency is relatively low compared to its face value. In 2022 for example, it their own currencost 13.8 cents to produce a $20 bill, and 17 cents to produce a $100 bill. cies. The Coins are no different. A quarter may only contain a few cents worth of cheaper that a government can metal, but its face value is worth 25 cents.

The United States penny was first introduced in 1793 and was produce money, the more profit it made of 100% copper. However, as the value of copper increased and achieves for itthe cost of producing pennies exceeded their face value, the U.S. gov- self, at least in the short term. ernment began to explore alternative metals for the coin.

In 1837, the composition of the penny was changed to a mix of copper and nickel. This change in metal content reduced the cost of production and helped to prevent the hoarding and melting of pennies for their copper value. However, the new composition also reduced the intrinsic value of the penny.

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THE DOLLAR Over the next century, the U.S. penny continued to be debased, with various changes in metal content and size. During World War II, the penny was made of zinc-coated steel to conserve copper for the war effort. This composition was only used for one year (1943) due to complaints about the coins rusting and confusion with dimes, which were made of the same material.

In 1982, the U.S. penny was debased once again with a change in composition from 95% copper and 5% zinc to 97.5% zinc and 2.5% copper. This change was made in response to rising copper prices and the high cost of producing pennies.

Colonial Currency In January 2019, Giorgia Meloni (who would later become “The solution is not to take Afri- Prime Minister of Italy) made waves when she accused France of exploitcans and bring ing African countries for economic gain through the seigniorage of the them to Europe, CFA franc system. The CFA Franc was a colonial relic, as it was originally the solution is to imposed by France on its former colonies as a way to maintain control free Africa from certain Europeans over their economies.

The CFA franc was a currency used in 14 African countries that who exploit it.”

G. Meloni, 19 were once French colonies. CFA stands for “Communauté Financière January 2019. d’Afrique” or “Financial Community of Africa.” The CFA franc was created in 1945 under the guise of promoting economic integration and stability among the French colonies in Africa.

What happens The currency is pegged to the euro at a fixed exchange rate. when an artificial exchange rate However, this exchange rate was only guaranteed with a condition: links two curren- France required African countries using the CFA franc to pool 50% of cies? Like silver their foreign exchange reserves with two African central banks which and gold in the American West, then deposited these with the French treasury. They were free to access the good money these reserves if they wanted to and France paid interest while holding is hoarded and them (at 0.75%). the bad money Certain specifics of Meloni’s comments were off the mark. But circulates even by December of that same year, based in part on her drawing attention more. Users of to the matter, major reforms were enacted: the ‘bad’ money get hurt economically while hoarders of ‘good’ money grow wealthy.

Now, compare the GDP and standard of living of the Euro countries to that of Eco countries.

  

the CFA Franc was renamed the Eco, ostensibly to remove the blatant ties to colonial France; an end to the requirement to deposit reserves with France; and withdrawal of French representatives from key decision-making bodies and a loss of veto power.

The CFA franc is no longer issued by France but by the two central banks that govern the monetary policy of these two zones (WAEMU and CAEMC). These central banks are the only ones to decide on the amounts to be issued and on the number of bills put into circulation. However, the two central banks are not entirely free in their

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THE DEBAUCHERY OF CURRENCY monetary policy because the value of the eco is pegged to the euro. This forces the two institutions to mimic the European Central Bank’s policy, which requires that the value of inflation be limited to less than 2% for the WAEMU and less than 3% for the CAEMC. Consequently, when the euro appreciates against other currencies, it can make exports from eco countries more expensive, which can hurt their economies. Countries that use the eco are not able to devalue their currency to boost exports or reduce the cost of imports, which can make it harder for them to compete with other countries in the region.

Conversely, when the euro depreciates, it can make imports more expensive, which can lead to inflation. Countries in Africa that use the eco are therefore subjected to two economic conditions which are outside their control: disadvantages to international trade on the one end, or inflation on the other.

The Seigniorage of Network Effects and the US Dollar The US dollar’s dominance in oil trade reinforces a network effect in the global financial system. This network effect is evident in the form of a feedback loop which creates lock-in.

A network effect refers to the phenomenon where the value of a product or service increases as more people use it. In other words, the more users a product has, the more attractive it becomes to potential new users, which further increases its value, creating a positive feedback loop.

Feedback loops occur when the output of a system becomes an input to the same system, resulting in a self-reinforcing and perpetual cycle. In the case of the petrodollar system, the network effect is evident in the widespread acceptance of the US dollar as the primary currency for international trade and financial transactions. As more countries adopt the dollar, the network effect strengthens, creating a positive feedback loop that reinforces the dollar’s dominance.

Lock-in refers to the situation where a product or service becomes so entrenched in a market that it becomes difficult for competitors to displace it. This means users cannot find viable substitutes, or if they do, they are inferior. Just as network effects create great value for users, leaving the network my result in serious, irreparable harm to the user leaving (or expelled).

In the case of the petrodollar system, the US dollar’s position as the dominant global reserve currency has created a lock-in effect, making it difficult for other currencies to challenge its position. This, in turn, reinforces the network effect.

The economic seigniorage of the US dollar’s reserve currency status manifests in two ways: sustainable trade deficits and lower interest rates.

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THE DOLLAR Firstly, it enables the US to run persistent trade deficits without experiencing the same level of negative economic consequences that other countries would face. A trade deficit occurs when a country imports more than it exports, which leads to a net outflow of its currency.

In most cases, this would cause a currency to depreciate, leading to higher inflation and increased borrowing costs. However, because the US dollar is the world’s reserve currency, other countries need to hold dollars to conduct international trade and transactions, which creates a steady demand for the currency and helps to maintain its value.

Secondly, the reserve currency status of the US dollar allows the US to borrow money from other countries at lower interest rates than other countries. This is because investors are willing to lend money to the US government in dollars, knowing that the currency is stable and widely accepted. As a result, the US government can borrow at lower rates, reducing the cost of servicing its debt and freeing up resources for other purposes.

THE BEGINNING OF THE END OF AN ERA, AGAIN On January 16, 2016, a C-17 Globemaster III, commonly used to transport large quantities of cargo and troops, landed in Tehran, Iran.

Instead of soldiers and equipment, this flight’s cargo was unique: pallets and pallets of cash totaling $400 million.

The payment of $400 million in cash to Iran caused an uproar of controversy. The timing of the payment, which coincided with the release of four American prisoners/hostages, led many to question the administration’s methods. Critics accused the US government of paying ransom to secure the release of the Americans, and that the payment itself as well as the timing sent a dangerous message to other countries that the US would negotiate with terrorists and pay ransom for hostages.

The allegations were vehemently denied by the administration, which maintained that the payment was a settlement of a longstanding dispute over a 1970s arms deal with the pre-revolution government of Iran. Despite the denial, the transfer of cash in such a secretive and unconventional manner left many people skeptical of the true intentions behind the payment.

The use of US dollars in international transactions, even those conducted in the middle of the night with pallets of cash, is indicative of the currency’s status as the world’s most trusted and valuable currency.

Many countries and international organizations hold significant amounts of US dollars in their foreign exchange reserves, and many commodities, including oil, are priced in dollars. This network of oil-backed dollars is crucial for international economic activity.

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THE DEBAUCHERY OF CURRENCY When countries run afoul of the good graces of the US and its allies, they are disconnected from this petrodollar network. In the case of the transfer of $400 million in cash to Iran, the use of physical cash was likely due to the sanctions imposed on Iran, which made it difficult for the country to conduct financial transactions through traditional banking channels. By providing cash–largely untraceable by the way–the US government could bypass its own sanctions and deliver the payment directly to Iran.

Since 1971, Saudi Arabia had been the largest producer of oil in the world, a title held for many years. This meant the US had to commit significant military and diplomatic resources to the Middle East.

Since 2018, the largest producer of oil in the world has been the United States. That makes a huge difference for a world currency that is tied to oil.

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LEDGER MONEY AND THE DEATH OF THE SAMURAI CHAPTER 6

LEDGER MONEY AND THE DEATH OF THE SAMURAI Excessive currency should be avoided.

—Nicolas Copernicus

T

he warrior sat down, cross-legged, and squinted at the red setting sun. Is this what has become of us? he wondered. Once the respected pinnacle of society, he and his colleagues now seemed to be nothing more than beggars. Each year, their condition worsened. He reflected on the continued erosion of the cultural tradition and the abandonment of their ancient code of honor. From his waistband, he pulled out a piece of paper, looked at it, and then tucked it away. Am I not worth more than a scrap of paper? He turned to his closest friend, sitting next to him, and said bluntly, “This cannot continue.”

A MATTER OF TRUST History is full of stories about how money is earned, spent, and lost. Aesop’s Fables and religious proverbs have conveyed financial wisdom to children and adults for centuries. Yet almost no stories exist that explain where money comes from. That is because, for thousands of years, money came from the ground in the form of gold. Paper money and electronic money, as we know it today, are relatively recent inventions. Unless you have taken a course in finance, you have not likely been taught the truth about the origins of modern money.

True barter, a system of exchange absent any money or debt, was probably not prevalent in large societies. It’s just too difficult to solve the double coincidence of wants. Several anthropologists argue barter is a myth. The archeological evidence is that barter, token money, and ledger money probably all existed simultaneously to varying degrees throughout different cultures around the world.

Individuals and groups have always exchanged goods and services based on informal arrangements of credit and mutual obligation, rather than formalized rules or laws. For example, it is possible to solve the double coincidence of wants with the invention of trade terms and

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THE DEBAUCHERY OF CURRENCY payment terms. These likely included conducting a swap of items at a Earlier, we future date or over time. Likewise, payment terms in currency could be pointed out that completed over a payment schedule. All that is needed is a record of the J.P. Morgan terms of payment, something that was certainly in place in ancient Mes- stated “Gold is money. Everyopotamia. thing else is Any pay-over-time or delivery-over-time system introduces trust credit.” This into the mix. The purchaser must be trusted to make the payment when chapter explains they say they will. The seller must be trusted to make the delivery when why the second part of that statethey say they will. Any agreement on the matter, written or otherwise, is ment—everything the de facto creation of debt. else is credit—is The problem with agreements is they sometimes fail, either in- true. J.P. Morgan tentionally or unintentionally. Unintentional failures can be caused by was commenting  

Misunderstandings: Parties to an agreement may have different interpretations of key terms and concepts, leading to misunderstandings and miscommunication.

Changes in circumstances: Economic downturns, natural disasters, and even the death of a counterparty can disrupt the underlying assumptions and conditions of an agreement, making it difficult or impossible to fulfill.

One or both parties may come to lack the necessary resources, such as time, money, or personnel, to fulfill their obligations under the agreement.

Intentional failures can be caused by   

Fraud: Misrepresenting material facts or providing false information to induce the other party to enter into an agreement.

Breach of contract: One party may intentionally fail to fulfill its obligations under the agreement due to competing interests or a loss of trust.

Sabotage: One party may intentionally sabotage the efforts of the other party to prevent the agreement from being fulfilled.

Debt can only function effectively when these risks are mitigated.

This requires a legal framework for enforcing the terms of the agreement and resolving any disputes that arise, including carrying out punishments for breaching parties. Collateral can secure an obligation under the agreement, but only if there is an independent and neutral third-party custodian to safeguard the collateral. Parties can enlist a third-party guarantor to provide additional assurance or post collateral to offset losses incurred by a default.

The ability to write is not enough to manage a debt economy. Any civilization with regular use of mercantile credit would also have to have a sophisticated system of law, enforcement, and dispute resolution, as well as a banking industry to provide custody, assurance, and perhaps

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on the notion of gold being hard money, and all other money being paper money.

Hard money has intrinsic worth.

Paper money derives its value from something else, or nothing at all.

Bitcoin replaces conventional trust enforcement systems with algorithms, cryptography, and distribution.

LEDGER MONEY AND THE DEATH OF THE SAMURAI even insurance. This implies a relatively stable government (or at least some agreed-upon authority) to administer these institutions.

The Kabunakama System The Edo period, also known as the Tokugawa period, was a period of Japanese history that lasted from 1603 to 1868. It was a time of relative stability and prosperity, marked by the rule of the Tokugawa shogunate, a military government that ruled Japan from the city of Edo (modern-day Tokyo). The Edo period saw significant developments in politics, economics, culture, and society, and it played a key role in shaping the modern-day Japan we know today.

One of the defining features of the Edo period was the establishment of a rigid social hierarchy known as the “Four Divisions of Society.” This system divided Japanese society into four classes: samurai, farmers, artisans, and merchants. The samurai were the ruling class, responsible for administering the country and maintaining order, while the farmers, artisans, and merchants were considered lower classes.

The farmers, who made up the majority of the population, paid taxes in rice, which was the most important commodity during the period. The rice was collected by officials known as daikan and was then sold at public auctions to fund the shogunate and other government expenses.

During the 16th and 17th centuries in Japan, gold and silver were Doesn’t limited supply increase not readily available in large quantities within the country. Most of the value? Yes, but gold and silver used in Japan during this time were imported from other there also has to countries through trade, primarily from China and Portugal. Gold and be enough money to match the size silver were highly valued and often used as a store of wealth or a means of the economy. of exchange. Gold was used primarily for high-value transactions, such as the payment of taxes or the purchase of luxury goods, while silver was more commonly used for everyday transactions, such as the purchase of food or other necessities. However, the value of the coins was subject to a high degree of fluctuation largely because there was such a limited supply of precious metal in the country.

To address these issues, the Kinsei Reforms established a fixed Here we go again. exchange rate between gold and silver coins, with one Koban (the standBut give credit ard gold coin) equal to ten Ryō (the standard silver coin). This exchange where it is due. rate was based on the prevailing market value of gold and silver at the At least they time, and it was periodically adjusted to reflect changes in the global made adjustments to the mint ratio. economy and the supply of precious metals.

At this point, Gresham’s Law takes hold. In the 1700s, Japan This likely mitigated the eco- did not have a unified currency system, and different regions had their nomic damage. own currencies with different exchange rates. The most widely used currency at the time was the sen, which was a copper coin with a square hole in the center. The value of the sen varied depending on the region and

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THE DEBAUCHERY OF CURRENCY the period, but it generally ranged from 1/100th to 1/10th of a gold ko- Early systems of ban, which was a larger rectangular gold coin. debt and credit Merchants and money changers would use moneylending and were not based exchange techniques to profit from the varying exchange rates of differ- on the accumulation of wealth or ent currencies. However, the lack of a unified currency system and the the pursuit of frequent fluctuations in the value of different coins made it difficult for profit, but rather merchants and consumers alike to conduct business with any degree of on the idea of reciprocity and certainty or consistency. mutual obligation.

As the value of the sen declined, people began hoarding the more valuable gold and silver coins and spending the less valuable sen.

Gold and silver coins were driven from circulation.

Farmers were at the bottom of the social hierarchy, and they had limited access to financial resources and other forms of capital. Coins Munehisa Honma “the God of marwere in short supply. Rice, which represented the majority of wealth for kets” (1724– farmers, was impractical as a currency.

1803) was a rice Under these conditions, the kabunakama system emerged. It al- merchant from lowed farmers and merchants to bypass the centralized control of the Sakata, Japan who traded in the shogunate and conduct transactions on their own terms. The kabu- Dōjima Rice Exnakama system was a credit-based system that was used in rural Japan change in Osaka during the Edo period (1603-1868) and into the Meiji period (1868- during the Tokugawa Shogunate.

1912).

Instead of using physical currency to conduct transactions, He is sometimes considered to be farmers and merchants recorded their transactions in paper ledgers, the father of the which were maintained by local merchants or moneylenders. candlestick chart, The kabunakama system worked by allowing farmers and mer- a form of techchants to open an account with a local merchant or moneylender. When nical analysis used in stock markets. a farmer or merchant needed to purchase goods or borrow money, they would have their account in the ledger credited, and when they sold their crops or products, their account would be debited. In this way, the kabunakama system allowed transactions to take place without the need for physical currency, which was often in short supply in rural areas.

Its flexibility made the kabunakama system a popular alternative to the more formalized banking systems that were in use in urban areas.

Borrowing and lending took place without the need for collateral or formal credit checks. It relied heavily on the maintenance of accurate ledgers, which were carefully monitored to prevent fraud and ensure that all transactions were recorded accurately.

The system also relied on the trust and reputation of its participants, as merchants and moneylenders who were known to be reliable and honest were able to attract more customers and build a larger network of transactions. In a society that placed a high value on honorable behavior, the kabunakama system provided a way for people to conduct transactions based on relationships, personal reputation, and mutual trust.

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LEDGER MONEY AND THE DEATH OF THE SAMURAI However, the kabunakama system was not without its drawbacks. One of the biggest challenges was the risk of default, as farmers and merchants who were unable to repay their debts could leave their creditors with significant losses. The system was criticized for being exploitative. Merchants and moneylenders could charge high-interest rates and fees. Additionally, the lack of regulation and oversight made the system vulnerable to fraud and abuse. There were instances of forgery and embezzlement by unscrupulous merchants and moneylenders.

The kabunakama system provides an instructive example of how a monetary system can be created without a formal regimented structure, using nothing but agreements, ledgers, and trust. The Meiji Restoration of 1868 brought about a series of reforms that modernized Japan's economy and government, leading to the establishment of a modern banking system and the adoption of the yen as Japan’s national currency. The kabunakama system had largely disappeared by this time, although it continued to be used in some areas until the early 20th century.

SWIFT, the Modern Kabunakama SWIFT (Society for Worldwide Interbank Financial Telecommunication) is a global messaging network used by banks and financial institutions that facilitates secure and standardized international financial transactions. When conducting international money transfers via bank ledgers, SWIFT plays a vital role in facilitating the communication and coordination between different banks involved in the transfer process.

The person or entity initiating the international money transfer starts by providing their bank with the necessary details, such as the recipient's bank account information, the amount to be transferred, and any additional instructions. The sender’s bank then creates a SWIFT message that contains all the relevant information about the transfer.

This includes details about the sender, recipient, transaction amount, currency, and any additional instructions or references. The sender’s bank securely transmits the SWIFT message over the SWIFT network. The network ensures the confidentiality and integrity of the message as it travels from the sender’s bank to the recipient’s bank.

Upon receiving the SWIFT message, the recipient’s bank processes the information. It verifies the recipient’s account details and checks for any compliance or regulatory requirements. Once the recipient’s bank confirms the validity of the transfer, it updates the account ledgers by debiting the sender’s account and crediting the recipient's account with the transferred amount.

The recipient’s bank sends a confirmation message via SWIFT to the sender’s bank, acknowledging the successful completion of the transfer. The sender’s bank updates the account ledgers by crediting the sender’s account and debiting the recipient’s account with the transferred amount.

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THE DEBAUCHERY OF CURRENCY When people talk about an “international wire transfer,” in all likelihood they are speaking about the SWIFT system. Like children passing notes in class, the SWIFT system only relays messages, not money. No “transaction of money” occurs directly, it is just a coordinated effort to balance separate bank ledger entries.

The Last Samurai During the late 19th century, the Meiji government undertook a When an emperor series of monetary reforms to modernize Japan’s economy and establish of Japan dies, he a stable currency system. However, these reforms also led to significant is given a posthusocial and economic changes that adversely affected certain segments of mous name that is a combination of society, particularly the samurai class. the era during One major reform was the abolition of the traditional feudal sys- which he reigned tem and the establishment of a centralized government. This led to the and his contribuloss of income and status for many samurai, who had previously relied tion to the throne. Thereon their feudal lords for financial support. Additionally, the government fore, he was pubintroduced a new currency system based on the yen, which replaced the licly known durold system of rice payments that had been in use for centuries. ing his life merely In 1870, the Japanese government began issuing paper currency, as “The Emwhich was backed by gold and silver reserves. However, this currency peror”, but he has been historically was not widely accepted by the public, and it was not until the mid-1870s known as “Emthat paper currency became the primary medium of exchange. peror Meiji” after The new currency system had far-reaching consequences for the his death. economy and society, particularly for those who relied on fixed incomes.

For example, samurai who had been receiving rice payments now found themselves with a fixed amount of yen, which lost value due to inflation.

This led to widespread dissatisfaction and unrest among the samurai, Monetary reform, rebellion, and who saw their livelihoods threatened by the new system.

With a Western monetary system in place, Japan began to expe- bloodshed: everywhere, all the rience Western world problems. Firstly, financially, the crushing of the time.

Satsuma Rebellion cost the government a total of ¥420,000,000 at the time, which was an enormous sum of money—roughly 5% of GDP. Japan adopted the gold standard in 1873. By 1881, it was forced to abandon the gold standard and print paper currency to cover its expenses. Around that same time, inflation reached a peak of around 24%, and it remained high for several years. Currency devaluation caused great economic hardship for the lower classes who struggled to afford necessities.

Japan’s government expenditures were reduced by a third. The national debt tripled. The costs of pacifying the former samurai led the Meiji government to the brink of insolvency. The government was forced to sell off state-owned enterprises such as factories and mines to politically connected merchants and former officials at low prices, leading to the instant formation of large industrial firms or zaibatsu. This led to the concentration of economic power in the hands of a few large

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LEDGER MONEY AND THE DEATH OF THE SAMURAI corporations, which in turn hindered competition and innovation. Investment in infrastructure projects and social welfare programs slowed to a crawl.

HOW MONEY IS CREATED Modern money—that is, what we commonly think of as money—is paper money. However, most money is ledger money. This money is created when banks lend. Loans and ledger money are the In cryptography, same things. Paper money is representative money, and what it repreAlice and Bob are sents is the money in the ledger. To illustrate this, we will work through fictional characsome examples with Alice and Bob. ters commonly used in discussions about cryptographic protocols or systems to describe participants or nodes, and in other science and engineering literature where there are several participants in a thought experiment.

Debt Alice in Australia has $100. It is a gold nugget she found lying in the red desert of Western Australia. Bob in Bali has nothing. Bob calls Alice and asks “Alice, can I borrow $90?” Alice agrees and clips off $10 for herself and sends $90 to Bob. Bob has $90 of gold to spend, but Alice still has assets of $100—$10 in gold and a $90 note. Whereas once there was $100 in the economy, now there is $190.

Alice can use her $90 note to buy something from Charlie in China if it is a negotiable bearer note. If Charlie accepts the note as payment, then Bob will owe Charlie $90. There is still $190 in the economy.

Credit Alice’s initial $100 in assets have grown to $262 in assets.

How? It was created out of thin air!

Alice in Australia has a $100 gold nugget. Bob in Bali has nothing. Bob calls Alice and asks “Alice, can I borrow $90?” Alice agrees but it is too much trouble to divide up the gold and ship it to Bali. She keeps the gold and instead gives a note to Bob that says, “I will cover Bob’s obligations to a limit of $90. I have $100 of gold to make good on my promise.” Bob has $90 of credit to spend, but Alice still has assets of $100.

Bob can use his $90 note to buy something from Charlie in China if it is a negotiable bearer note. If Charlie accepts the note as payment, then Bob will owe Charlie $90. There is still $190 in the economy.

Ledger Money Alice in Australia has a $100 gold nugget. Bob has made a purchase of $81 from Charlie in China, on credit. Bob has $9 in credit remaining and Charlie has a note for $81. Diana in Denmark has nothing.

Diana calls Charlie and asks “Charlie, can I borrow $72?” Charlie agrees. Diana is very far away, so Charlie writes in his ledger “I lent

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THE DEBAUCHERY OF CURRENCY Diana $72” and Diana writes in her ledger “I have $72 from Charlie which I owe back to him”. Whereas once there was $190 in the economy, now there is $262.

THE MODERN MONEY SYSTEM The creation of new money through debt, credit, and ledger entries can continue for a long time. There are several things necessary to make this system work.

Monetary System Integrity First, everyone must be willing to accept various notes, coins, Between 1980 paper money, and ledger entries being transacted as a medium of ex- and 1995, more change. Without acceptance, there is no exchange and therefore no than 2,900 US banks and money. Acceptance is the most important factor. thrifts–with colSecond, the money itself must meet the other four criteria for lective assets of good money: portable, durable, divisible, and scarce. more than $2.2 Third, each party must trust the other party to honor their obli- trillion–failed. gations of transfer and repayment. Transactions must settle in a timely manner and there must be an acceptable timeframe for exchanges and payments to take place. There may be other conditions, such as the payment of interest.

Fourth, there must be a system in place to detect and prevent forgery, fraud, and error. The notes cannot be counterfeit. The ledgers must be accurate. This oversight regime can take many forms, including rules and regulations about how the system must operate, inspections of ledgers and notes, and credit checks on the ability of parties to repay. A dispute resolution process is also valuable.

Fifth, there must be a limit on how much money can be created via credit, and how much must be kept in reserve to handle routine payment needs (liquidity), unexpected payment needs, and cover the risk of nonpayment by borrowers.

Sixth, there must be a limit on the rate at which new money is created, otherwise, the economy becomes flooded with money, the money loses value, and all participants suffer a loss of purchasing power.

Money-like Cash Equivalents Objects that have most of the properties of money and that are used as a medium of exchange are money-like. Tokens are money-like because they are used as currency without being currency themselves. In finance, instruments that serve as a substitute for cash, or that can be readily converted to cash, are called cash equivalents.

The loans from Alice to Bob and Bob to Charlie are money-like cash equivalents: pieces of paper that point to money elsewhere but can be exchanged just like money itself.

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LEDGER MONEY AND THE DEATH OF THE SAMURAI In this example, we have four people. What if we continued so that Diana lent 90% to Eric, and so on? With a total of 116 participants in the economy, this $100 would have grown to $1,000, and that is the maximum that could be achieved in this scenario.

If it seems like a house of cards, that’s because it is to some extent.

Here is an example of how precarious this arrangement is. Diana takes $42 and invests it in DUMBCOIN. DUMBCOIN is a new cryptocurrency that is sure to make everyone who invests in it rich. Everyone, including the CEO of the popular social media site Chirper is talking (“chirping”) about it. The project has a cool meme slogan: “Forget the moon, we’re going to Jupitor!” and yes, Jupiter is misspelled. It also has a cool logo that is a mix of a dog or a frog or some silly thing like that, named “Sunk Mole.” Diana loses all her money in DUMBCOIN. Diana owes Charlie $72 but she cannot pay Charlie in full. DiMoney can be created from ana pays Charlie $30 and says “Sorry.” Charlie only gets $30. Worse, nothing. This Charlie knows he will never get paid the difference from Diana; his loan point cannot be to Diana is now worth $0. stressed Charlie owes Bob $81 worth of goods that Bob paid for on enough. This is credit, tea leaves to be exact. Charlie has the $30 from Diana which he taught in every uses to buy bulk tea leaves. Charlie sends $30 of tea from China to Bob banking textin Bali and says “Sorry.” book at every Bob paid $81 for tea leaves, on credit, but only has $30 worth of university.

Every banker tea leaves. “I was going to sell that tea to my customers in my tea shop!” knows this! exclaims Bob. Bob sells his brewed tea for $40. Bob owes Alice $90.

Bob pays Alice $40 and says “Sorry.” Bob is forced to close his business Politicians, on because he did not sell enough tea to pay his other expenses. the other hand, Alice gets $40 repaid from her original loan. Worse, Alice knows generally do not she will never get paid the difference from Bob, who is now out of busiknow this. A 2017 poll found ness; her loan to Bob is now worth $0. Alice has $10 she kept in reserve that 84% of plus $40 from Bob: $50.

One bad investment by Diana caused a $42 default, but the British lawmakers don’t know domino effect caused the economy to go from $262 in assets to $50 in that banks cre- assets, a loss of $212 in value! ate money Can this happen? It has and does, even recently. The Panic of when they lend. 1907 and the Great Depression of the 1930s are historical examples. The Global Financial Crisis of 2008 is a modern example. The Banking Crisis of 2023 is the most recent example.

Fractional Reserve Banking Assume that Alice, Bob, Charlie, Diana, and Eric are the names of banks and not people.

Notice that in each case, the lender loaned 90% of their cash and kept 10% for themselves. This 10% has a name: the reserve ratio (r).

The total amount of money that can be created is

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THE DEBAUCHERY OF CURRENCY 𝑀𝑀 = 1�𝑟𝑟

M is called the money multiplier. If r is 0.1, the M = 100. In the example with Alice, Bob, and Charlie, we started with $100 and r = 0.1.

The total value would be $100 × (1 ÷ 0.1) = $1,000.

Put another way, $100 deposited in a bank becomes $1,000 worth of money in the economy!

If we change the reserve requirement to 20%, then $100 × (1 ÷ 0.2) = $500

and less money would be created in the economy.

This system has a name: fractional reserve banking. It is the most common form of banking practiced by banks in the world. Deposits from customers are lent out to borrowers, but the bank holds a small amount in reserve equal to only a fraction of the bank’s deposit liabilities.

What is to keep the banking system from collapsing as a result of a few bad investments? First, banks and the government set rules about who can borrow money, what amounts can be borrowed, and for what purpose. Usually, amounts are secured with collateral, so banks don’t lose their entire investment. Even with such measures in place, it is not a perfect system.

Central Banks One of the functions of a central bank is to monitor and manage the risk in the banking system, as well as the economy at large. It does this, in part, by managing the supply of money in the economy.

For example, the Federal Reserve sets the reserve requirements for private banks. Low amounts mean banks can lend more, which means more money creation. High amounts mean banks can lend less, which means less money creation. By changing the reserve requirement, the Federal Reserve can literally create and destroy money in the economy at will.

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LEDGER MONEY AND THE DEATH OF THE SAMURAI

The US money supply M2, trillions of dollars.

Central banks have considerable influence over the money supply because they usually set the reserve ratio. When the reserve ratio is increased, it means that banks are required to hold a higher percentage of their customers' deposits as reserves. This reduces the amount of money available for banks to lend out, leading to a contraction in the money supply. With less money being lent out, there is a decrease in the creation of new loans and subsequent deposit creation.

The central bank also acts as the bank for private commercial, retail, and merchant banks. In other words, the central bank will lend money to commercial banks, which in turn gets lent to the banks’ customers. People trust the money created by commercial banks because it is exchangeable one-for-one with central bank-created money. But importantly, commercial banks usually have a government guarantee, usually through a type of insurance program.

Monetary Policy Tools The Federal Reserve, the central bank of the United States, employs three main monetary policy tools to influence and manage the nation’s money supply, interest rates, and overall economic conditions.

Open market operations involve the buying and selling of government securities, primarily U.S. Treasury bonds and notes, in the open market by the Federal Reserve. When the Fed buys these securities from banks and other financial institutions, it injects money into the economy, increasing the money supply. Conversely, when the Fed sells securities, it reduces the money supply. Open market operations are the most frequently used and flexible tool of monetary policy, allowing the Fed to directly affect the reserves of banks and influence interest rates.

The discount rate is the interest rate at which commercial banks can borrow funds directly from the Federal Reserve's discount window.

By adjusting the discount rate, the Fed influences the cost of borrowing for banks, which, in turn, affects interest rates throughout the economy.

A lower discount rate encourages banks to borrow more, stimulating 89

THE DEBAUCHERY OF CURRENCY lending and economic activity. Conversely, a higher discount rate makes borrowing more expensive, discouraging excessive borrowing and potentially slowing down economic growth.

As mentioned previously, the Federal Reserve sets the reserve Not all money requirements for depository institutions, including commercial banks printing is bad! and credit unions.

Provided the

The Causes of Inflation The amount of money in the economy must match the size of the economy. When it does not, the result is either inflation or deflation.

Inflation can be understood through the lens of supply and demand dynamics. When the supply of goods surpasses the demand (too little money in the economy), prices tend to decrease, resulting in a state known as disinflation. Conversely, when the supply of goods is insufficient to meet the demand (too much money in the economy), prices rise, leading to inflation.

When consumers have greater purchasing power due to an increased money supply, their demand for goods rises, driving up prices.

This scenario represents demand-pull inflation, where excessive money chasing relatively fewer goods causes prices to increase.

Another factor influencing inflation is cost-push inflation. This type of inflation occurs when production costs, such as labor, raw materials, or energy, increase significantly. When the cost of production rises, producers pass on those increased costs to consumers by raising prices.

Population demographics play a significant role in determining the demand for goods and services, thereby impacting prices. When the population increases, the demand for goods and services tends to rise. If the money supply does not increase, then there will be too little money in the economy relative to supply, and prices will fall. This can be bad for producers who would then be selling their goods at a loss.

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population is growing or productivity is increasing, new money must be created to satisfy the demand without adversely affecting prices.

LEDGER MONEY AND THE DEATH OF THE SAMURAI 1.20 Since 1900

Purchasing Power of $1.00

1.00 0.80 0.60

Since the Creation of the Federal Reserve in 1913 Since Bretton Woods in 1944 Since Leaving the Gold Standard in 1971

0.40 0.20

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 105 110 115 120

0.00 Years Elapsed

Purchasing Power of $1.00. Each re-tooling of the US monetary regime has resulted in a more rapid deterioration of the currency’s value.

THE END OF AN ERA, YET AGAIN The economic changes brought about by the implementation of a modern monetary system in Japan during the Meiji Restoration period had a profound impact on the social and economic status of the samurai class. These changes reduced their income and thereby undermined their social standing. The modern monetary system opened up new economic opportunities for merchants, industrialists, and professionals. The samurai, who were traditionally associated with martial skills, found it challenging to adapt to the changing economic landscape. Their skills were less relevant in the emerging industrialized economy, and they faced increasing competition from new social classes.

Facing extinction, the samurai rebelled. Saigō Takamori, a prominent samurai from the Satsuma domain, became a vocal critic of the Meiji government’s reforms and led a movement to restore the power of the samurai class. This eventually led to the Satsuma Rebellion against the government in an attempt to restore the old order. The popular movie The Last Samurai is a dramatization of this war.

The Battle of Kagoshima was a climactic clash that echoed the valor and honor of the samurai. It was a dramatic culmination of the era that showcased their unwavering spirit, even in the face of impending defeat. The samurai fought with a fervor fueled by their undying loyalty to their lord and their unyielding determination to protect their honor.

They moved as one, an unstoppable force that refused to surrender.

But despite their valor, the samurai were outnumbered and outgunned. The encroaching modern weaponry, propelled by relentless firepower, set the skies ablaze with the fiery rain of cannon fire, decimating the samurai and tearing through their ranks like a tempest.

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THE DEBAUCHERY OF CURRENCY As the sun dipped below the horizon, casting an eerie glow over the battlefield, the samurai warriors assembled with a final, steely resolve.

Saigō was wounded, and the military forces demanded his surrender; he refused. Saigō and his closest followers gathered at a small inn in Kagoshima where wrote a final letter to Emperor Meiji, expressing his remorse for his actions and his hope for a peaceful resolution to the conflict.

Crippled by a bullet and too weak to perform ritual seppuku himself, Saigō was beheaded by his faithful follower, Beppu Shinsuke.

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BITCOIN CHAPTER 7

BITCOIN Running bitcoin.

—Hal Finney, Bitcoin Pioneer

On what was otherwise an ordinary Tuesday morning, Jack sat down at his computer. The president of a small investment advisory firm in eastern Washington state, Jack was usually the first in the office so that he could evaluate the news from Asia and trade at the market open.

It was just another day, or so he thought, until an alarming message flashed across his screen. He pressed several keys. Nothing worked—no files, data, or programs. The only thing he could see was a reddish window with an image of a lock and a message: “Oops, your files have been encrypted!”

Nobody was in the office, and nobody would arrive for at least another hour. Some type of countdown clock was running on his screen.

Of the many questions and concerns racing through his mind, one, in particular, stood out, so much so that he asked out loud in the emptiness: “What the hell is a Bitcoin?”

ELECTRONIC CASH Bitcoin was the first digital currency to solve two challenges associated with digital money—controlling its creation and avoiding its duplication—at once. Any currency which becomes successful is subject to the originator wanting to issue more of it. This inflationary effect reduces the currency’s value. Bitcoin’s production process (called “mining”) limits the production of coins to 21 million over approximately 150 years. Since the maximum number of Bitcoin is fixed, over time Bitcoin should become more valuable relative to other currencies as the supply of government-backed fiat currencies continues to increase. Its certain limited supply is a unique feature that stands in opposition to nearly every other traditional currency.

The concept of digital money traces back to the 1970s when various pioneers explored the possibility of creating a decentralized electronic cash system. One notable development during this time was the invention of cryptography-based systems. In 1977, renowned computer 93

THE DEBAUCHERY OF CURRENCY scientist David Chaum introduced the idea of “digital cash” in his paper titled “Blind Signatures for Untraceable Payments.” This concept formed the basis for secure, anonymous transactions in the digital realm.

Chaum’s work led to the formation of DigiCash in the early 1990s, which aimed to create an electronic payment system. DigiCash implemented cryptographic techniques to ensure the security and privacy of transactions. Although DigiCash faced challenges and eventually ceased operations, its pioneering efforts set the stage for future advancements in digital currencies.

Another notable development in the 1990s was the creation of e-gold. Launched in 1996, e-gold allowed users to make online payments using a digital currency backed by physical gold. While e-gold faced regulatory issues and legal challenges, it demonstrated the feasibility of dig- Liberty Reserve ital currencies and their potential benefits, such as fast and borderless became associated with illegal transactions.

In the early 2000s, concepts like Liberty Reserve and WebMoney activity. A cenemerged, further pushing the boundaries of digital money. These systems tralized system, it was labeled a enabled users to store and transfer funds digitally, opening up new poscriminal entersibilities for online commerce and global transactions. However, these prise by authoricentralized systems faced issues with trust, regulation, and enforcement, ties and seized. highlighting the need for a decentralized and transparent digital currency.

A groundbreaking whitepaper titled “Bitcoin: A Peer-to-Peer WebMoney simply failed to Electronic Cash System” was published in 2008 by a person or persons gain widespread using the pen name Satoshi Nakamoto. This whitepaper introduced acceptance. blockchain (the name Bitcoin was not decided on until later). Blockchain solved the long-standing problem of double-spending in digital cash with controls on the potential for inflation.

The invention marked a significant milestone in the evolution of digital money. Rather than introduce fundamentally new concepts, it took existing concepts like distributed ledgers, proof-of-work consensus, and cryptography and applied them in a way that made electronic money feasible. Its open-source nature led to the development of a vibrant ecosystem of cryptocurrencies, each with unique features and goals. The success and proliferation of Nakamoto’s Bitcoin Blockchain inspired countless other digital currencies and laid the foundation for the broader adoption and acceptance of digital money.

BLOCKCHAIN Electronic counterfeiting, or double spending, is a significant concern in digital transactions. In traditional digital payment systems, there is a risk that a digital file representing money can be duplicated and spent multiple times, leading to fraud and undermining the integrity of the currency. Bitcoin solves this problem through the invention of a new type of database called blockchain.

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BITCOIN

Counterfeit Resistance

SHA-256 and RSA are used for password protection, email security, validating file downloads, and website security.

The blockchain is a duplicated, distributed public ledger secured by cryptographic proof of work. All transactions are transparent and immutable. A block is a group of transactions that has been processed and added to the ledger. The term chain references the database indexing system whereby a portion of the previous block is coded into a digital fingerprint and included in the next block. Thus, each block is connected to the previous block, like a chain.

When a Bitcoin transaction occurs, it is broadcasted to a network of computers known as nodes. These nodes validate the transaction and include it in a block. The block is then added to the blockchain, forming a chronological and permanent record of all transactions. This new ledger is redistributed to all other nodes.

This distributed ledger system eliminates the possibility of double spending in three basic ways. First, the encryption technology (a combination of RSA and SHA-256) is so strong it is not possible to break it: Given the vast number of possible inputs, even with modern computers and high computational power, it would currently take an extremely long time, likely beyond the age of the universe, to crack a single SHA-256 hash through a brute-force attack. Second, because all transaction blocks are linked, any change to one must necessitate a change to all subsequent transaction data. This means forging not one transaction, but thousands of transactions. Lastly, this change would need to be made on thousands of computers distributed around the world, at the same time, and in a way that nobody detects.

Attempting to spend the same Bitcoin twice would require overpowering the majority of the network’s computing power, an endeavor that is highly impractical and expensive—too expensive for an attacker to financially benefit.

Maintenance of Purchasing Power The second problem Bitcoin addresses is the maintenance of purchasing power. With traditional fiat currencies, central banks have the authority to issue more money, leading to inflation and a loss of value over time. Digital money faces the same challenge, as there is a temptation to issue an unlimited supply of currency, ultimately rendering it worthless.

Bitcoin tackles this issue with two limitations. The first is a limitation on the rate at which new Bitcoin are created. This rate is fixed at a set amount every ten minutes (approximately). If it becomes too easy or too difficult for new Bitcoin to be created, the algorithm adjusts. The second is a limit on the maximum number of total Bitcoin created, frequently cited as 21 million. That limit will be reached in over 100 years.

However, it is important to note that the computer code governing the network does not use the concept of Bitcoin as its unit of 95

THE DEBAUCHERY OF CURRENCY account. The basic unit of account is the satoshi. There are 100 million satoshis per Bitcoin, meaning the maximum production limit is 2,100,000,000,000,000 satoshis. Of these, approximately 1.9 quadrillion have been mined and 600 trillion have been irretrievable lost.

There are approximately 200,000 satoshis available for every single person on earth, more than enough to go around. The value of a satoshi is a social convention governed by acceptance and demand.

Bitcoin is scarce not because it has limited supply, but because it meets the four criteria of economic scarcity: difficult to obtain, unable to be counterfeited, independent value, and requires an economic choice.

Proof of work was proposed

by Dwork and Naor in 1993 as a mechanism to require a certain amount of computational effort to send an email or perform certain actions, deterring spammers from HOW BITCOIN ARE CREATED flooding sysMining is the dual process of adding transactions to the ledger tems with automated requests.

and creating new Bitcoin. The Bitcoin reward is simply new Bitcoin added to the transaction ledger. When a miner successfully validates and adds transactions to the blockchain, they receive fees and a reward. Both the fees and the reward are paid in Bitcoin. The former is a transaction fee paid by the sender; the latter is new money created from work.

The process by which a miner successfully validates and adds transactions to the blockchain is called proof of work. Imagine the blockchain is a vault with a long digital combination. To open the ledger, a computer must guess the combination–called a nonce–using brute force. With a single fast computer, this could take years, perhaps decades. Consequently, miners use multiple computers, sometimes thousands. After each successful guess, the nonce is reset.

Satoshi Nakamoto’s early Bitcoin logos and the final logo, attributed to bitboy . The angle of the ₿ symbol is 21° representing 21 million coins.

BLOODY HARD It is incredibly difficult to describe Bitcoin, so much so that an entirely separate book must be dedicated to the topic. In July 2010, the creator and several supporters were attempting to write a description for the technical manual which would be distributed to Bitcoin miners and node operators. Satoshi expressed his frustration:

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A single bitcoin mining machine has about a 1 in 4.3 billion chance of finding a nonce, the ‘password’ of sorts that allows writing to the blockchain ledger.

BITCOIN “Sorry to be a wet blanket. Writing a description for this thing for general audiences is bloody hard. There's nothing to relate it to.”

In the years since, there have been many analogies given. That said, Bitcoin is a new invention and therefore has no comparison.

Digital Token Money Bitcoin is best analyzed as a digital token. Some history regarding a popular Italian telephone token−the gettone−is necessary because the principal of network effects, upon which money’s acceptance value is derived, originated from a description of telephone networks.

The word gettone (pronounced “jet-TONE-ay”, plural: gettoni) literally means “token.” The first Italian telephone token was created in 1927. It was a little disc made of an alloy of copper, nickel, and zinc, or bronze. Production stopped in 1983 when it was replaced with magnetic phone cards. It is estimated that 600 million such tokens were produced.

Italian Gettoni circa 1980.

Gettoni were commonly used as and interchangeable with a 50 Lira coin until 1980, when its value (and the cost of a phone call) suddenly doubled to 100 Lira. The doubling occurred again in 1984, to 200 Lira, again a result of a price increase associated with pay-phone calls. It remained at that value until 2001 when the Euro was introduced and the gettone suddenly lost its money-like nature in the Italian economy.

The parallels between the gettone and Bitcoin are many. Interestingly, during the periods in which the token’s price was increasing or expected to increase, Italians hoarded gettoni. Gettoni were readily exchanged into Lira, but not other currencies. Both serve only limited roles as a literal form of currency, and as fiat money both are intrinsically worthless. It was not necessary to have a gettone to make a phone call; one could use a phone at the home or office to do that. Likewise, one is not required to use Bitcoin to make purchases but can choose to do so for convenience or other reasons. People carried both gettoni and Lira, in the same way people hold Bitcoin and their currency of domicile. Like Bitcoin, the cost to counterfeit a gettone, relative to its value as a medium of exchange, was so high it was ridiculous to even consider it. And, like 97

THE DEBAUCHERY OF CURRENCY Bitcoin, a user could do one of three things: spend it, exchange it for government currency, or hold it.

The holders of gettoni and the payphones themselves are a network. The value of a gettone to someone in that network, when spending the coin, is one of convenience and the value of the information relayed over the network. If we assume a growing number of pay telephones and callers, and then apply the constraint of a fixed number of gettoni, we have mirrored the key elements of Bitcoin’s supply and demand characteristics.

Digital Gold Bitcoin is often referred to as digital gold due to its similarities to the precious metal in terms of store of value characteristics. Like gold, Bitcoin meets all of the four fundamental criteria for good money: Portable: digital money is portable by nature.

Divisible: 1 Bitcoin = 100,000,000 satoshis.

Durable: the encrypted distributed ledger is perhaps the most secure technology on earth. It is not subject to decay over time, wear from use, or erosion from the environment.

Scarce: Bitcoin is economically infeasible to counterfeit, so participants must give up something of value to acquire it. There are only three ways to acquire Bitcoin:  Purchase on the open market for fiat currency;  Sell goods or services in exchange; and  Earn block rewards and transaction fees through mining.

With the first four properties in place, all that remains for Bitcoin to be good money is acceptance driven by demand.

One key similarity between Bitcoin and gold is their status as a store of value. Gold has been widely recognized and valued for centuries due to its inherent scarcity, durability, and universal acceptance. Similarly, the blockchain provides the durability that makes Bitcoin a reliable store of value in the digital realm.

Both gold and Bitcoin have some resistance to inflationary pressures that can erode the value of traditional fiat currencies. While central banks can increase the money supply and devalue fiat currencies, Bitcoin’s protocol limits the issuance of new coins, by design. This makes Bitcoin deflationary, meaning its purchasing power tends to increase over time. This incentivizes holders of the currency to save and invest, rather than engage in excessive spending. The limited supply and predictable issuance schedule make Bitcoin resistant to the devaluation that can plague traditional fiat currencies.

Financial Payments Network Unlike gold, Bitcoin is spendable. In that regard, Bitcoin is more like a gold coin than a gold bar.

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BITCOIN Bitcoin transactions are initiated by users who send funds from their digital wallets to the recipient’s wallet address. One of the key advantages of Bitcoin as a payment network is its borderless nature. It allows for seamless and near-instantaneous transactions across geographical boundaries. Traditional cross-border payments often involve intermediaries and lengthy settlement times, whereas Bitcoin enables direct peer-to-peer transactions, eliminating the need for intermediaries and potentially reducing transaction costs and delays.

If bitcoin isn’t Bitcoin also offers privacy in transactions. While the details of “real money,” transactions are recorded on the public blockchain, the identities of the then neither is the parties involved are typically represented by cryptographic addresses, global banking system. providing a certain level of privacy.

Furthermore, Bitcoin transactions can be conducted at any time, as the network operates 24/7 without interruptions. This feature makes Bitcoin a viable option for global commerce, where traditional banking hours and international time differences can pose challenges for timely transactions.

Fundamentally, Bitcoin operates no differently than the modern SWIFT network: coordinated ledger entries through secure messaging.

Virtual Safe Deposit Box Just as a safe deposit box at a bank offers a secure location to store physical value, Bitcoin provides a virtual space for the safekeeping of value, but in electronic form. In the case of Bitcoin, this includes the cryptographic keys that grant access to the ownership and control of the digital currency. These keys are stored within digital wallets, which can be likened to the safe deposit box itself.

Similar to a safe deposit box, Bitcoin wallets can be accessed and managed by the owner exclusively. The private keys act as the digital “keys” to the safe deposit box, allowing individuals to control and manage their Bitcoin holdings. The wallet owner is the sole custodian of these keys, eliminating the need to rely on third-party intermediaries.

Safe deposit boxes come in various sizes, and in the physical world, there are limits to the value that can be stored. As an electronic store of wealth, these size limits don’t exist: the “size” of the virtual safe deposit box is always the exact size of the value being stored.

Security is a crucial aspect of both Bitcoin wallets and safe deposit boxes. Bitcoin employs advanced cryptographic techniques to ensure the integrity and privacy of transactions and wallet access. Just as a safe deposit box is secured within a bank’s vault, Bitcoin wallets use encryption and authentication protocols to safeguard the private keys from unauthorized access or theft.

Another similarity between Bitcoin and a virtual safe deposit box is the ability to access and manage the assets remotely. Bitcoin wallets can be accessed from anywhere with an internet connection, allowing users to monitor their holdings and initiate transactions at their convenience. Likewise, many banks offer online access to safe deposit boxes,

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THE DEBAUCHERY OF CURRENCY enabling customers to view and manage their box contents without physically visiting the bank.

Virtual Real Estate Bitcoin ownership is exclusive and can be considered a form of property rights. When someone possesses Bitcoin, they have exclusive control and access to their holdings, just as property owners have the right to use and enjoy their real estate. Bitcoin’s decentralized nature ensures that individuals have ownership and control over their digital assets without the need for intermediaries.

Bitcoin also shares the characteristic of scarcity with real estate.

Just as there is a limited supply of land or office space, Bitcoin has a limit to the virtual space available used to store financial data.

Telecommunications Network The Bitcoin network is fundamentally a messaging system. The content of the message is the transfer of value or financial transaction: “I’m Alice and I send one Bitcoin to Bob.” While traditional telecommunications systems primarily focus on the exchange of information or data, Bitcoin extends this concept to enable the transmission of monetary value across the network.

In this analogy, the participants in the Bitcoin network can be seen as subscribers of the telecommunications system. Each participant has a unique address, similar to a phone number, which serves as their identifier on the network. Through their addresses, participants can send and receive Bitcoin, analogous to making and receiving phone calls or messages in a telecommunications system.

To transmit a financial transaction, the sender initiates a message by creating a transaction using their private key, which serves as a digital signature. This message contains information such as the recipient's address and the amount of Bitcoin being sent. The transaction is then broadcasted to the Bitcoin network, similar to dialing a phone number or sending a message through a telecommunications network.

WHY BITCOIN HAS VALUE On the day that it was live, the Bitcoin blockchain had all of Aristotle’s characteristics of good money: portable, durable, divisible, scarce, and fungible. The only thing it lacked was acceptance.

No Such Thing as Bad Publicity People will not accept as money something they do not trust and that includes something they don’t understand. For the first eight years of its existence, it was practically unknown.

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BITCOIN Ironically, ransomware attacks that demanded payment in Bitcoin led people to ask, “What is a Bitcoin?” Such attacks garnered significant media attention. This extensive coverage exposed some individuals to Bitcoin for the first time.

Bitcoin had already gained significant recognition and public awareness in 2013. Bitcoin reached new price highs very quickly, followed by a crash associated with the collapse of the Mt. Gox exchange.

Additionally, Bitcoin’s association with illegal activities on darknet marketplaces like Silk Road, which operated several years before the ransomware wave, also contributed to its notoriety.

For Bitcoin’s value to be realized, however, it needed acceptance. This acceptance is largely the result of network effects.

The Network Effect in Bitcoin Network economics is an emerging field within the information society. Its premise is that products and services are created, and value is added, through networks operating on large or global scales. This is in sharp contrast to industrial-era economies, in which ownership of physical or intellectual property originated from a single enterprise.

In a 2014 New York Times article, economist Hal Varian asked a fundamental question: why are the dollar bills in people’s pockets worth anything? According to Varian, there are two possible explanations: (a) the dollar bills carry value because the government in power says so; and (b) because people are willing to accept it as payment. He concludes that the value of a dollar comes not so much from government mandate as from network effects.

Of course, the dollar is accepted because the Bretton Woods and petrodollar systems forced countries to use and hold dollars by linking that currency to oil.

In the context of financial transactions, larger networks have more value than smaller networks. Suppose there is a network of four friends: John, George, Ringo, and Paul. John has tickets to a concert he believes is popular. He offers to sell the tickets for a large markup over face value to George, Ringo, and Paul. No one accepts his offer. What can John conclude about the asking price of the tickets? Perhaps none of his friends are free the night of the concert. Perhaps they don’t like that type of music. Perhaps they don’t like concerts.

John lists his tickets on a popular website where his offer is viewed by 40 would-be purchasers. Still, he receives no bids. Now John is more likely to conclude that his price is too high. The network has provided valuable information to John about his asking price. But everyone in the network receives valuable information: since all other participants see that the ask was not accepted, each participant receives 39 confirmations that his or her rejection of the asking price was justified.

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THE DEBAUCHERY OF CURRENCY The important thing to note here is that all participants have gained value from the network, even though no transaction actually occurred.

Now suppose John is in the ticket sales business. He lists many thousands of tickets at various prices. Some ticket-price combinations attract a large number of bids, and some ticket-price combinations attract a small number of bids. Thus, transaction volume at a specific price level also provides valuable information, and this value accrues to all participants, whether they actually engage in a transaction or not.

For over a decade, Bitcoin’s price, as well as the viability and merit of the Bitcoin network itself, has been derided by classical economists as fiction. Criticisms of Bitcoin range from purely speculative investment to outright fraud. There is a common yet misinformed belief, even among ardent supporters and holders of Bitcoin, that the true value of Bitcoin is at best unknown and at worst not knowable or zero.

No modern currency, not even sovereign fiat currency, has intrinsic or fundamental value. Every currency in widespread use today is representative money. Commodity money has other characteristics that impart value, namely scarcity and durability, that paper money does not.

However, lack of intrinsic value is not the same as having no value. The Federal Reserve Bank of St. Louis published a research note explaining that the lack of fundamental value is a perfectly normal and acceptable characteristic of both representative and commodity money: Gold, for example, trades above its value as measured by its industrial applications. The U.S. dollar trades above its fundamental value in discharging U.S. tax obligations. The premium some people are willing to pay for gold and the U.S. dollar reflects the value these objects possess as exchange media. The market value of these objects would decline, but not fall to zero, should this premium suddenly vanish.

An examination of Bitcoin prices offers some interesting observations that directly counter the “value is a mystery” myth. The first is that, as proponents have long argued, the value of a currency is primarily dependent upon the use and acceptance of that currency. Again, citing the Federal Reserve: What is the source of the fundamental value of Bitcoin?

Think about it this way. At its core, Bitcoin is a database management system. Database management systems can have a fundamental value if they are tailored to meet the needs of a given constituency. Bitcoin offers people a money storage and transfer system with two key properties: (i) permissionless access and (ii) decentralized database management. The first property means that no one can prevent a user from sending any amount of Bitcoin from one account to another. The

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BITCOIN second property means that the protocol does not depend on the existence of a delegated authority to manage accounts and transfer funds. The fundamental demand for Bitcoin derives from the fact that there are at least some people who value these features. This fundamental demand provides a non-zero lower bound on the price of Bitcoin.

Bitcoin doesn’t have to be accepted by everyone to have value.

It only needs to be accepted by some people. The more people that accept it, the more value it has. This principle is known as Metcalfe’s Law.

Metcalfe’s Law Metcalfe’s Law is a principle that states the value of a network is proportional to the square of the number of connected users or devices in that network. Named after Dr. Robert Metcalfe, the law has found practical applications in various domains, including the internet, phone networks, social media platforms, currencies, and cryptocurrencies like Bitcoin.

In the realm of the internet, Metcalfe’s Law holds tremendous relevance. As the number of internet users grows, the value of the network increases exponentially. Consider the World Wide Web, where each website serves as a node in the network, and every user contributes to the overall connectivity. The more websites and users there are, the more opportunities for interaction, collaboration, and information sharing.

Internet Year

8,192

500.0

4,096 2,048 50.0

1,024 512 256

5.0

128 Bitcoin Addresses

0.5 Internet Users (Mil)

64 32

Internet Users (Mil)

Bitcoin Addresses Millions

Robert Metcalfe is a renowned as coinventor of the ethernet and co-founder of 3Com Corporation.

16 8

0.1

4 Bitcoin Year

Bitcoin adoption in the 2010s has followed roughly the same path as internet adoption in the 1990s-2000s.

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THE DEBAUCHERY OF CURRENCY This exponential growth in value incentivizes more people to join the network, further reinforcing its strength. Examples of internet-based services that adhere to Metcalfe’s Law include search engines like Google, social networking platforms like Facebook, and e-commerce marketplaces like Amazon. The more users these platforms have, the more valuable they become, attracting even more users and perpetuating a positive feedback loop.

Phone networks also demonstrate the application of Metcalfe’s Law. As more individuals own telephones, the value of the network increases due to the expanded communication possibilities. A single telephone has limited utility on its own, but when connected to a network with millions of other telephones, it becomes an invaluable tool for communication and coordination.

Social media platforms like Facebook, Twitter, and Instagram thrive on network effects. The value of these platforms lies in the ability to connect and interact with others. As more people join, the potential for communication, content sharing, and social engagement expands exponentially. A single user may have limited interaction on a social media platform, but as the network grows, the possibilities for connections and engagement increase, leading to a richer experience for all users. The success of social media platforms is deeply rooted in the principles of Metcalfe’s Law, as the value they provide is directly tied to the number of users and their interactions.

Currency systems also align with Metcalfe’s Law to a large extent. The value of a currency is intricately tied to its widespread acceptance and use. As more people adopt a specific currency, its value and utility increase. Consider the Euro, which was an intentional effort to make a more competitive, more valuable currency by combining the multiple small currency networks of several countries into a single, larger one.

As more individuals embrace Bitcoin and participate in its network, its value increases exponentially. Bitcoin benefits from network effects, as a larger user base leads to increased liquidity, wider acceptance, and enhanced security. Each new user and every additional transaction block strengthen the network, making it more attractive and accessible to new participants.

FUDBUSTING Bitcoin is plagued by misconceptions and myths that often cloud its true nature and potential. Some of this misinformation has roots in historical fact but is now outdated. As this digital currency continues to capture the attention of individuals, investors, and institutions worldwide, it becomes crucial to debunk the most common misunderstandings

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FUD is a term used relating to the spreading of negative or misleading information with the intention of creating fear, uncertainty, and doubt

BITCOIN surrounding Bitcoin. Let us unravel the truth behind the most common misconceptions that have persisted in popular discourse.

Bitcoin is Anonymous One of the most common myths about Bitcoin is that it provides complete anonymity. In reality, Bitcoin transactions are pseudonymous, meaning that they are associated with unique addresses rather than personal information. However, the blockchain is a public ledger, and with careful analysis, it is possible to trace transactions back to individuals.

Bitcoin is Primarily Used for Illegal Activities Another misconception is that Bitcoin is primarily used for illicit purposes. Early adopters of Bitcoin have used it for illegal transactions on darknet markets. However, since tracing tools have become more prevalent, the vast majority of Bitcoin transactions are now legitimate and conducted for lawful purposes such as investments, online purchases, remittances, and fundraising for various projects.

Bitcoin is a Bubble There have been numerous claims throughout Bitcoin’s history that it is a speculative bubble waiting to burst. While Bitcoin has experienced significant price fluctuations, including both booms and corrections, its long-term trend has shown resilience and growth. There are several explanations for the high volatility exhibited by Bitcoin that have nothing to do with investor euphoria.

Manipulation Mt. Gox, once the largest Bitcoin exchange, collapsed in 2014 after a massive hack that resulted in the loss of approximately 850,000 Bitcoin. It was later revealed that Mt. Gox had been operating with significant internal security vulnerabilities and had manipulated Bitcoin prices through bots engaged in automated trading. There are numerous other instances of false information being fed to investors by unregulated exchanges to induce trading at unrealistic prices.

Supply Inelasticity Price inelasticity of supply relates to Bitcoin’s limited supply and throttled transaction throughput.

Imagine your favorite artist is performing a highly anticipated concert in your city, and there are a limited number of tickets available for purchase. Despite the high demand for these tickets, the venue can only accommodate a certain number of people due to space limitations.

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THE DEBAUCHERY OF CURRENCY Now, let’s say the ticket prices for this concert increase significantly. Despite the increase in price, the number of available seats remains the same. People who really want to attend the concert are still willing to pay the higher price because they value the experience and the opportunity to see their favorite artist perform live. The limited supply of tickets in relation to the high demand creates a situation where the price becomes less influential in determining the quantity supplied.

Similarly, in the case of Bitcoin, the supply is fixed, and changes in its price do not lead to a corresponding increase in supply. As more people become interested in owning Bitcoin, the demand rises, and people are willing to pay higher prices to acquire it, even if the price keeps increasing.

Bitcoin is Bad for the Environment Critics frequently point to the high energy consumption of Bitcoin mining as evidence of its negative environmental impact. While it is true that Bitcoin mining consumes a significant amount of energy, it is crucial to contextualize this within the broader energy landscape.

Context Traditional banking systems, for instance, consume 60 times more energy than Bitcoin through data centers, branches, and ATMs! Moreover, studies suggest that the energy consumption of gold mining, a traditional store of value, exceeds that of Bitcoin mining. Thus, comparing Bitcoin’s environmental impact solely in terms of energy consumption presents an incomplete picture.

Energy Sources Another important aspect to consider is the source of energy used for Bitcoin mining. The notion that bitcoin was a polluting enterprise grew out of the fact that a majority of bitcoin mines used to be in China, with heavy reliance on fossil fuels and few environmental controls. While some miners still rely on fossil fuels, that is rapidly changing.

Electricity cost is a major expense for miners, and they are incentivized to move their mining facilities to where energy is cheapest.

Those happen to be greener energy sources, including hydroelectric, solar, and wind power. This shift demonstrates the potential for Bitcoin to drive demand for renewable energy and accelerate the transition to a sustainable energy future. Furthermore, Bitcoin mining can function as an energy demand response, whereby excess energy from renewable sources is utilized during off-peak periods, reducing wastage, and maximizing resource efficiency.

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Bitcoin is a Ponzi Scheme Named after Italian businessman Charles Ponzi, a Ponzi scheme is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors. Detractors that claim Bitcoin is a Ponzi scheme understand neither the money creation process nor network economics. Bitcoin shares none of the characteristics of a Ponzi scheme.

How a Ponzi Scheme Works A Ponzi scheme operates by channeling funds from various sources into a central entity, typically the perpetrator of the fraud. Rather than generating any new value, the money is simply transferred and subsequently spent, often on extravagant luxuries. This process leads to the overall destruction of value. In order to sustain the scheme, early investors are paid using funds contributed by new investors, all the while without the awareness or permission of these new participants. To further cover up the illicit activity, the perpetrator manipulates the ledgers, forging records to hide the true nature of transactions and account balances.

If Bitcoin is a ponzi, then the SWIFT interbank transfer system must also be a ponzi since they work the same way.

How Bitcoin Works Money in the form of bitcoin flows from an original source, typically a miner, to multiple entities, mirroring the functioning of the traditional banking system. Contrary to popular belief, new money is indeed created, and to understand this concept better, one can delve into the history of fiat money and fractional reserve banking. Acquiring bitcoin can be done through mining–where transactions are validated–purchasing it in an open market, or exchanging goods and services for bitcoin.

Although the participants involved may remain pseudonymous, the transactions themselves are publicly recorded. Furthermore, tens of thousands of participants hold identical ledgers, ensuring that all transactions and balances are transparent and available for public scrutiny.

While it is true that bitcoin requires new participants to substantially increase in value, this is no different than any other enterprise, especially networks. However, the limitations on the issuance of new bitcoin ensure that it will increase in value relative to any other form of money that issues at a faster rate, even if no new participants join the network.

THE BEGINNING OF AN ERA WannaCry, a malicious ransomware program, spread like wildfire across the globe. It exploited a vulnerability in Microsoft Windows operating systems, encrypting files, and demanding ransom payments in Bitcoin to unlock them. The attack targeted individuals, businesses, and

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THE DEBAUCHERY OF CURRENCY even critical infrastructure, leaving a trail of chaos and uncertainty in its wake.

With their systems compromised and critical data held hostage, victim firms faced a pivotal decision. Should they succumb to the demands of the attackers and pay the ransom in Bitcoin, or should they explore alternative solutions to regain control of their operations?

Considering the severity of the attack and the potential consequences of prolonged downtime, the firm’s leadership made the difficult decision to pay the ransom. Driven by a mix of desperation and curiosity, Jack embarked on a frantic journey to understand Bitcoin and its relevance to his current predicament. As he delved into research, he unraveled the intricate world of cryptocurrencies, blockchain technology, and decentralized networks. Eventually, his firm acquired the necessary Bitcoin and initiated the payment process. The hours that followed were filled with anxiety, as they awaited confirmation that the decryption keys would be delivered, and their valuable data would be restored.

To their relief, the attackers proved true to their word. The firm received the decryption keys, enabling them to regain access to their encrypted files. However, this experience was not without its lessons. Jack recognized the urgent need to bolster their cybersecurity measures, investing in comprehensive training programs for their employees, implementing advanced threat detection systems, and regularly updating their software to patch vulnerabilities.

The WannaCry attacks served as a stark reminder of the growing threat landscape in the digital age. WannaCry infected over 300,000 computers in more than 150 countries within just a few days, making it one of the most widespread cyberattacks in history. The estimated economic impact of the WannaCry attack was in the billions of dollars. The disruption caused by the attack led to significant financial losses for affected organizations, including costs associated with ransom payments, system recovery, and lost productivity.

The United States and other intelligence agencies have attributed the WannaCry attack to North Korea, specifically pointing to the involvement of the Lazarus Group. This group has been associated with several high-profile cyberattacks and is believed to operate under the direction of the North Korean government. In September 2018, the US Department of Justice indicted Park Jin Hyok, a North Korean hacker, for his alleged involvement in the WannaCry attack, along with other cybercrimes targeting financial institutions and other organizations. .

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EPILOGUE: THE CURRENCY WARS CHAPTER 8

EPILOGUE: THE CURRENCY WARS Money kills more than do weapons.

—Nigerian proverb Although you may not have realized it, this book has traced the history of money through examples in the Agrarian Age, Industrial/Manufacturing Age, and Information Age. In each era, monetary policy and its effects on currency were intertwined with the nature and objectives of political and economic warfare.

The pursuit of wealth in the Agrarian Age was achieved through territorial expansion for resource acquisition. Kings, emperors, and warlords aimed to conquer and control territories to increase their wealth and power. The weaponization of food through siege warfare was prevalent: agrarian societies dependent upon food were starved into submission. Monetary policy, as understood in modern terms, did not exist in the same way during the Agrarian Age. However, the acquisition of resources and wealth through warfare was closely tied to economic prosperity by controlling fertile lands and storing the resulting wealth through precious metals.

Warfare in the Industrial/Manufacturing Age was directed at destroying the means of production and distribution. Kinetic warfare meant that weapons produced in factories were used to destroy other factories that produced weapons. Central banks and governments issued debt, printed money, or raised taxes to finance conflicts. Funding a conquest could be much easier if money were simply printed out of thin air; and so it was.

With the Information Age, we enter a realm of virtual money based on data, and bloodless warfare based on the corruption of information. As Elon Musk put it, “Money is just data that allows us to avoid the inconvenience of barter.” Warfare in the Information Age manifests as asymmetric conflict with the goal of information superiority. Information superiority involves not only obtaining accurate and timely information but also denying or misleading adversaries. Not surprisingly, then, cyber warfare and economic sanctions have emerged as tools that

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THE DEBAUCHERY OF CURRENCY can disrupt or manipulate currency and financial systems to achieve strategic objectives. If money is just information, then money is now simultaneously an objective and a weapon.

Nowhere has the concept of economic warfare been more recently demonstrated than in the Russo-Ukrainian war. After the Russian invasion of Ukraine in 2022, the United States and its allies have taken robust economic actions against Moscow. Their objectives are twofold: to disrupt Russian military operations and to deter and penalize those involved in providing financial or logistical support for Russia's ongoing aggression toward Ukraine. This unified coalition implemented a diverse range of economic measures, including international sanctions, financial restrictions, and export controls that specifically target vital sectors of the Russian economy. These measures have significant implications for banking, energy, technology, defense, and transportation.

Russia, in turn, is coordinated with like-minded countries like Brazil, India, and China along with others like Saudi-Arabia and South Africa (the BRICS nations), to intentionally disconnect from the global dollar network and establish their own, presumably digital, currency.

Blockchain technology makes this easier, but that does not necessarily translate into wealth creation. On the contrary, multi-currency systems have a history of failure, but not before they erode the economy into a system of chaos and decay.

THE TENETS OF MONEY The currency regimes of the past share common tenets. There is no reason to think things will be different in the future.

Good Money Currency must have all the properties of good money, or it will fail. One study of 775 fiat currencies found the average lifespan of a currency to be just 27 years: 20% currencies failed through hyperinflation; 21% were destroyed through war; 12% were destroyed through independence; 24% were “monetarily reformed”; and 23% are still in circulation.

The US dollar is no exception. Major currency reform has been enacted, on average, every 26 years.

Acceptance Acceptance plays a crucial role in giving money its value, and network effects are a key mechanism through which acceptance influences the value of a currency. The dominant currency is the one with the most users and supports the largest economic networks. Feedback loops 110

EPILOGUE: THE CURRENCY WARS create size, and this size creates value through convenience, establishing a Schelling point and lock-in. Once this dominance is secured, it is practically unbreakable.

Work Money, in any form, must represent work to have value. The work can take the form of physical labor, energy expenditure, productive output, or information that contains value about work itself. Alternatively, money may be acquired without work by exchanging it for another thing of value which itself represents an equivalent amount of work.

To the extent that the face value of the money is less than the value of work that it embodies, it is cheapened or counterfeited. Money can be issued based on future work, as in the case of lending, so long as the present value of that work is consistent with the value of money created.

Musk may be right that money is data for the convenience of exchange. And it is certainly true that money can be, and is, created from nothing. But money must also be the embodiment of work or some other economic sacrifice. If the data is modified in a way that dilutes the economic value of the work represented, then the money is debased and inflation is the result. If work is absent, then money carries no value.

Congruence Ensuring that the money supply aligns with the size of the economy is essential to maintain price stability, support sustainable economic growth, and prevent inflation or deflationary pressures. The principal problem with gold as good money is that there just is not enough of it to support the size of the global economy. It cannot expand enough to match economic growth. Bitcoin also has (or eventually will have) this problem. Consequently, these currencies suffer as media of exchange but excel as long-term stores of wealth.

The problem with representative money, particularly fiat currency, is that it expands too quickly. Governments not only have the authority to create and increase the money supply at will, but they also have the incentive to do so. In the modern economy, however, most money is created through private lending, with banks acting in their own interests without much regard for broader economic consequences. As Satoshi Nakamoto put it, “Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve.”

The result is predicted by Gresham’s Law. Fiat money, which is cheaply available, is used for spending; scarce money, like gold and bitcoin, is used for saving.

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Natural Self-Interest Gresham’s Law is just a formulation of natural human behavior associated with self-interest and self-preservation with regard to financial condition. It is no different than any other self-interest behavior. Given a choice to stand in the rain or seek shelter, humans will choose to seek shelter. If forced to stand in the rain when shelter is available, humans will do so for a little while, until their patience is exhausted, and they rebel.

In a multi-currency system, individuals have choices and options regarding which currencies they hold and use. They evaluate currencies based on their perceived value, stability, acceptance, and potential for appreciation or depreciation over time. If individuals believe that a particular currency will maximize their personal future wealth, they will likely seek to acquire and hold that currency. If no exchange rate is fixed by law, people will adopt good money and shun bad money.

If, in the eyes of a government, people are choosing the “wrong” currency, then they will fix an exchange rate by law. Consequently, people will hoard good money driving it from circulation; good money serves exclusively as a store of value while bad money serves exclusively as a medium of exchange. In an international context, the good money will leave the country in the form of international payments, while the bad money will be paid to governments in taxes. This persistent decline in wealth only incentives the government to print more bad money to attempt to fill the gap. Such policies always exacerbate the problem.

There are no examples of this policy’s success in the entire record of human history.

Inflation Creates Wealth Disparity Keynes warned that inflation by debasement “impoverishes many…enriches some.” Copernicus scolded the Prussian government’s debasement for worsening the impoverishment of the lower classes: “[T]hose who are affected by this tremendous disaster...contemptuously despise it,” and sarcastically suggested the elites in government were pleased by “the cheapness of currency and the destruction of the country.” Gresham, Thier, Franklin, and so many others expressed the same sentiment. They did not need to read about it in a book. They witnessed it firsthand.

Money debasement is a vacuum that sucks wealth from the lower classes and deposits it in the coffers of the rich. The reason should be obvious: the poor must use more money to buy fewer goods of necessity, while the wealthy benefit from the increased indirect seigniorage the defiled currency brings.

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EPILOGUE: THE CURRENCY WARS

Cycles of Debt Beget Violence The cycle of debt, debasement, revolution, and currency reform is a recurring pattern observed throughout history. It begins with the accumulation of unsustainable debt, which puts strain on the economy. To alleviate the burden, governments typically resort to debasing the currency, diminishing its value, and eroding public trust.

Debasement leads to socio-economic discontent, and rebellions or social upheavals follow as people demand change. In the aftermath of such events, currency reform becomes necessary to restore stability and rebuild trust. Currency reform often involves restructuring the monetary system or introducing a new currency to establish a reliable framework for economic recovery.

Rational thinkers will often state that there is no such thing as “free stuff,” and that government debts are repaid through either taxes or inflation. This is incomplete. Taxes and inflation only delay the reckoning. History tells us that the debt that serves as bad money will be repaid with blood by future generations. One strains to find exceptions.

In all likelihood, Bitcoin breaks this cycle because it deprives governments of a potent tool through which they have, historically, gained and wielded power. Perhaps with Bitcoin, “this time is different.”

INFORMATION WARFARE: THE NEXT FRONTIER OF CURRENCY DEBASEMENT As we witness the rise of digital currencies and the growing acceptance of technology in our financial systems, the battleground for currency success has shifted to the realm of information warfare. In the digital age, as in the past, the acceptance of a currency is crucial to its success. However, competing digital currencies, including Bitcoin, face the challenge of erosion in acceptance due to various tactics employed in the information warfare landscape.

The acceptance of a currency is the bedrock upon which its value and utility are built. Historically, currencies gained acceptance through the trust placed in their issuing authorities and their widespread use in economic transactions. In the digital era, acceptance extends beyond traditional borders, as individuals, businesses, and governments across the globe assess the viability of various digital currencies. This acceptance is heavily influenced by factors such as stability, security, efficiency, and the potential for widespread adoption.

With the emergence of CBDCs and the rapid growth of cryptocurrencies like Bitcoin, the competition for acceptance becomes fiercer.

CBDCs, being issued and regulated by central banks, have an inherent advantage in terms of credibility and trust. However, the erosion of acceptance can occur through several avenues. Competing digital currencies may seek to discredit each other through negative narratives to create 113

THE DEBAUCHERY OF CURRENCY doubts about their viability and security. These tactics can erode public confidence and hinder acceptance.

The truly horrific potential of CBDCs is only now just becoming apparent. CBDCs will be weaponized by imposing restrictions or sanctions on a foreign country’s access to that digital currency. Governments will block or freeze CBDC accounts held by individuals or entities in the targeted country, limiting their ability to transact or access funds denominated in the CBDC. This will disrupt their economy, impede trade, and exert significant economic pressure.

Burning Down the Banks On October 25, 2021, the Central Bank of Nigeria (CBN) introduced the eNaira, marking the first Central Bank Digital Currency (CBDC) in Africa and the second worldwide after the Bahamian Sand Dollar. The eNaira functions as a digital counterpart to the physical Naira, maintaining its value, legal status, and liability under the CBN. It operates on the Hyperledger Fabric private blockchain, utilizing an account-based system that requires user identity verification for transactions. The eNaira serves as a retail CBDC, accessible through digital wallets, offering individuals direct control over their holdings.

Months prior to the eNaira’s launch, on February 5, 2021, the CBN issued a directive to banks, forbidding them from supporting cryptocurrency transactions and services. Conversions between fiat and crypto could no longer rely on commercial banks. The CBN cited concerns about crypto-associated risks like money laundering and terrorism financing. While no outright ban on cryptocurrencies was enforced, crackdowns on users increased, and circulars divulged individuals’ information, leading banks to freeze their accounts.

This stance is significant as Nigeria’s persistent inflation (often 10% or more) and currency devaluation fueled crypto adoption. Cryptocurrency use in the country ranks highest globally, with around onethird of the population engaged.

Nigeria boasts Africa’s largest economy, with a 2021 GDP of $514 billion. However, challenging exchange rates, inflation, and the CBN’s crypto crackdown have driven Nigerians to peer-to-peer trading platforms, bypassing local banks. One such platform, Paxful, saw a 27% increase in trading volume two months after the CBN’s restrictions.

1.9 trillion naira of the old notes were taken from circulation and replaced with only 300 billion new Naira notes. The gap was supposed to be filled by CBDC adoption. The CBN offered various incentives to kickstart the CBDC’s popularity. CBN even launched a discount scheme for motorized rickshaw taxis for users. In August 2022, the scheme was opened up to people who didn’t even have bank accounts. One year after the launch of the eNaira, less than 0.5% of Nigerians were thought to be using it.

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The word naira is believed to have been derived from the combination of two words in Nigeria’s major languages, nai (from the Nigerian word for “Nigeria”) and ra (a local word for “silver” in Hausa, a widely spoken language in Nigeria).

EPILOGUE: THE CURRENCY WARS

By December of that year, Nigeria imposed limits on cash withdrawals in a move to push consumers towards the eNaira. The Central Bank of Nigeria (CBN) applied limits on over-the-counter withdrawals at just ₦100,000 ($225) per week for individuals and ₦500,000 ($1,123) for businesses. Taking cash out of ATMs was capped at ₦20,000 ($45) per day, with only ₦200 ($0.45) notes and smaller denominations being available from the machines. Customers were able to take out larger sums in some instances but had to pay processing fees of between 5% and 10%.

The result, consistent with Gresham’s law, monetary history, and the theme of this book, was predictable: traditional cash (“good money”) was hoarded and driven from circulation. For weeks, rioters attacked ATMs, blocked roads, and burned banks in multiple Nigerian cities as anger spilled on the streets over the shortage of cash. Excerpts of news reports capture only a fraction of the carnage: “Angry customers burned tires and blocked major roads while banks, shops and other businesses were shut.”

“One of the protesters said, ‘We are hungry and we are in a cash dilemma. No new naira notes and they are rejecting the old ones. People cannot eat, do business, we are hungry and people are dying and they are still saying politics.’”

“A fuel station in the area was set on fire for rejecting the old notes.”

“At least three people were killed in clashes.”

All of this could have been avoided if the most cryptocurrencysavvy public in the world chose to use the eNaira. They didn’t. The entire debacle can be summarized simply: When forced to use a central bank digital currency, the Nigerian people opted to burn down the banks.

Nigeria’s example strongly indicates that the average citizen recognizes the considerable threat to individual financial autonomy posed

by CBDCs, without offering any distinct advantages.

While CBDCs have gained significant traction among central bankers, policymakers, and consulting firms in recent times, the sentiment among citizens has been quite different. In the case of the United States, when the Federal Reserve sought input on CBDCs, more than two-thirds of respondents expressed apprehensions about potential risks to financial privacy, personal freedom, and the stability of the banking system.

Moreover, CBDCs do not introduce any particularly innovative features to the market that would directly benefit consumers. Many currencies are already accessible in digital forms through mechanisms such as debit cards, payment applications, and even prepaid cards. This lack of novelty becomes evident from the notably low adoption rate witnessed in Nigeria.

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THE DEBAUCHERY OF CURRENCY The Nigerian CBDC experience has been nothing short of a disaster. The government resorted to all kinds of financial tricks and inducements to increase the eNaira’s infinitesimal adoption rate, but nothing worked. Nigerians don’t want a CBDC because Nigerians don’t need a CBDC.

A Different Form of Money?

Despite this cautionary tale, history tells us that the lesson will not be learned. Governments can be counted on to manipulate the value of their CBDC relative to other currencies to impact foreign exchange rates and destabilize the economy of a targeted country. By artificially devaluing their CBDC, they will undermine the value of the targeted country’s currency.

In times of economic or political instability, we will see governments resort to devaluing or seizing funds held in CBDC accounts, causing citizens to suffer significant losses. This will be done through the manipulation of exchange rates, sudden devaluations, or freezing of accounts.

Additionally, cyber-attacks or technological vulnerabilities in CBDC systems can be exploited to disrupt or manipulate financial transactions, causing significant economic damage to a foreign country. Hacking or compromising the infrastructure supporting CBDCs will lead to financial chaos, loss of confidence, and economic depression.

CBDCs represent the single greatest threat to human freedom since Communism.

A CBDC isn’t just “a different form of money.” At the push of a button, authorities can and will impose limitations on the use of CBDCs, such as transaction limits, spending restrictions, or even timebound expiration of funds. When layered over the existing financial surveillance regime, it is so much more. Even outside the United States, the international officials implementing CBDCs (and so-called pilot programs) openly support the enhanced surveillance and control mechanisms a CBDC provides: “[T]he key difference with the CBDC is the central bank will have absolute control on the rules and regulations that will determine the use of that expression of central bank liability, and also we will have the technology to enforce that.”

—Agustín Carstens,

H ead of the Bank of International Settlements

The primary objective of a Central Bank Digital Currency (CBDC) is to comprehensively observe and track the entirety of an individual’s financial transactions and activities. This surveillance is conducted with the intention of wielding influence or control over people’s

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EPILOGUE: THE CURRENCY WARS financial and non-financial conduct through a combination of incentives and penalties.

By closely monitoring how individuals use their money, policymakers and authorities can design and implement targeted measures to influence their spending habits, saving practices, and investment decisions. Financial inducements can be structured to encourage desirable behavior, but not just financial behavior. Individuals will be rewarded with monetary incentives when their speech, conduct or lifestyle align with government social objectives. Conversely, punishments could involve imposing penalties or restrictions on certain transactions (or all of them) that are deemed contrary to the intended goals of government policy.

Did you give money to a church? Which church? How does that church spend its money? Who else gives money to that church?

What are the social credit scores of those individuals? Your spending is automatically restricted, not because you gave money to a church, but because you affiliate with a group of people the authorities have determined to be of “high social risk.” Your social credit score is lowered. If it gets too low, your money will literally be switched off. You will have nothing and have access to nothing. It’s a new form of economic expulsion.

This system is already in place. In China, if you’re caught jaywalking, the facial recognition system immediately displays your face on a public board of shame. They then automatically deduct your fine from your digital wallet and downgrade your social credit score.

DEBT: THE DEBAUCHERY OF CURRENCY In 2023 and for only the second time in history, the U.S. government debt rating was graded down (by Fitch) from its “perfect” status. The first downgrade occurred on August 5, 2011 when Standard & Poor’s lowered the long-term credit rating of the United States from its highest rating of AAA to AA+ with a negative outlook. Both downgrades were attributed to concerns about the U.S. government’s ability to effectively address its rising levels of debt.

A high government debt burden represents a modern form of currency debasement due to the economic and financial implications it creates. Here’s how it works: Inflationary Pressures: When a government has a high level of debt, it resorts to borrowing more money to meet its financial obligations. If the government borrows extensively from its own central bank (through mechanisms like printing money or creating electronic reserves), it increases the money supply in the economy. An increase in the money supply without a corresponding increase in goods and services will lead to inflationary pressures, and prices rise. This erodes the

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THE DEBAUCHERY OF CURRENCY purchasing power of the currency, making it worth less in terms of goods and services.

Confidence in Currency: High levels of government debt erodes confidence in a country’s ability to manage its finances and pay off its debt. Investors and foreign exchange markets might start to doubt the government's ability to make timely payments on its debt, leading to concerns about default. As a result, investors might demand higher interest rates to compensate for the perceived risk, which can further strain government finances and potentially weaken the currency.

Interest Rate Pressure: To manage its debt, a government will resort to keeping interest rates artificially low. While this might help ease the burden of debt payments in the short term, it can lead to excessive borrowing and spending, which contributes to higher inflation and weaker currency value in the long run.

Reduced Foreign Investment: Additionally, lower interest rates deter foreign investors from holding government bonds denominated in that currency, further affecting their value. A country with high levels of debt and potential currency debasement is less attractive to foreign investors. As investors worry about the stability and value of the currency, they will seek other investment opportunities, which leads to reduced foreign capital inflows. This can put additional pressure on the currency’s value.

In 2023, the U.S. Government debt stood at an all-time high of $33 trillion. The interest rate on that debt was approximately 4.5%. The interest that will accumulate over the next 10 years on a $33 trillion debt with a 4.5% annual interest rate compounded annually can be calculated as approximately $17.5 trillion. That works out to $4.8 billion per day.

If the interest rate is lowered to 2.5%, it is still $9 trillion in additional debt, or $2.5 billion per day.

Total Debt, Trillions of USD

60 50

250 Goverment Debt has grown at an average 7.9% per year.

The US Population has grown at an average 0.5% per year.

The individual debt burden will increase from $99,000 / person to $208,000 per person over the next ten years.

The difference is made up for with inflation, debasing the US dollar and making each person a little bit poorer by 3% per year.

40

200 New US Government Debt & Interest

Interest on Current US Government Debt, assuming payments are refinanced with new debt and no additional new debt is added.

30 20

Current US Government Debt

150

100

50

10 0 2023

Per Capita Debt, Thousands of USD

80 70

0 2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

U.S. Debt, Total and Per Capita. Source: Federal Reserve.

The total net worth of all billionaires in the U.S. is estimated to be between $3 and $4 trillion. Annual debt service is roughly $1.5 trillion.

If all the billionaires in the U.S. were taxed at 100% of their wealth to pay just the interest on this debt, the tax revenue source would be fully

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EPILOGUE: THE CURRENCY WARS depleted in about three years. Of course, that’s naïve. Debt compounds.

Prices drop when assets are sold en masse. As a practical matter, the combination of these two things means that the tax revenue source would be fully depleted in about one year. Furthermore, the asset liquidation associated with over 500 billionaires would itself crash asset prices globally, causing a chain reaction of economic collapse that would leave millions upon millions without work. There would be no more Apple, Microsoft, Amazon, Tesla, or Google. They would cease to exist, evaporated to pay down 1/3rd of the interest on the current national debt.

The median income in the United States is about $53,000 per year. The per capital share of debt is about $99,000 per year. This debt burden, financed over a 40-year career, is about $5,400 per year or $447 per month. At 10% of gross income, this debt burden is manageable via taxation.

Debt grows at 7.9% per year while the population only grows at 0.5% per year. Incomes grow at 4.5% per year. This means the debt burden will swell to $208,000 in just ten years. It will take 14% of one’s income to support the debt at that point.

From there it only gets worse. The individual debt burden, as a percentage of income, doubles about every 20 years. By 2080, over half of one’s income must be reclaimed by the government to finance the debt (note is just the debt, not all government spending needs like military funding, entitlements, and the day-to-day operations of the government).

60%

50%

Wealth confiscation through monetary and fiscal policy doubles every 25 years.

40%

30%

20%

10%

0% 2023

2033

2043

2053

2063

2073

2083

Portion of U.S. Personal Income that is Taxed or Inflated Away to Pay for the National Debt

This trend is unsustainable. At some point, wealth confiscation becomes the norm. But since it happens across generations, nobody notices or seems to care. This is what Keynes meant when he said, “The process engages all the hidden forces of economic law on the side of destruction, and it does it in a manner which not one man in a million is able to diagnose.”

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THE DEBAUCHERY OF CURRENCY Taxation in excess of 50% is impractical and only serves to delay, not solve, a worsening situation. Of course, nobody is going to confiscate 100% of the wealth of every billionaire or even 50% of the income of an ordinary worker. How will this debt be paid for? Mostly with currency debasement in the form of money-printing inflation. It is a mathematical certainty. History says the final chapter ends, more likely than not, in bloodshed.

BITCOIN: THE CURRENCY OF CRISIS Of all the possible use cases for Bitcoin, none has offered as much value yet been so underreported as its use in times of crisis. This is, in part, because most Bitcoin ownership is in North America and Europe. Western countries typically have well-established financial systems with stable currencies, robust regulatory frameworks, and governmentbacked protections. As a result, the general perception is that traditional currencies and existing financial infrastructure adequately address crisis situations.

That is not the case in many other parts of the world. In 2023, the combined population of the ten countries with the highest inflation was over 400 million people. The average inflation rate in these ten countries was 60%.

Venezuela has been plagued by hyperinflation, with the country witnessing a staggering rise in prices. The inflation rate in Venezuela reached unprecedented levels, peaking at an annual rate of over 60,000% (some sources say one million percent) in 2018. In Turkey, the inflation rate was 85% in 2022.

At the time of the publication of this book, inflation in Argentina was over 100%, with the purchasing power of the peso dropping by 50% every one to two weeks. In Lebanon, it’s 260%. Iran is undergoing a banking crisis so bad they won’t even release inflation data. There are, however, several videos on social media showing protestors attacking and burning banks.

In these countries, bitcoin isn’t just an option, it’s the only option. Gold is difficult to acquire and even more difficult to spend. Conventional financial market instruments and banking systems are at risk of failure. Real estate is costly and illiquid. Imagine the price of food for your family doubled every month. What possible other options do you have to preserve your wealth and income besides saving through Bitcoin?

In an effort to stimulate economic growth and combat deflation, the Bank of Japan implemented a negative interest rate policy in 2016.

This policy aimed to incentivize lending and discourage excessive savings. However, negative interest rates erode the value of savings, making it challenging for individuals, particularly the elderly, to maintain their

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EPILOGUE: THE CURRENCY WARS standard of living. With Japan’s aging population, there was concern about the ability to generate income for retired citizens.

One solution to this was that the Japanese bought safes–literal physical fireproof home vaults–in which to store cash. Earning nothing was better than having the effects of negative interest reduce bank account balances.

Against this backdrop, Bitcoin gained popularity in Japan. The Japanese would have immediately understood bitcoin as ledger money given its history with rice brokers and ledger entry systems. Japan was certainly familiar with Bitcoin, as home to the first and largest Bitcoin exchange Mt. Gox. And the name Satoshi Nakamoto probably contributed to acceptance as well. Japan became the first country to officially recognize Bitcoin as legal tender in 2017.

An incredibly compelling case for Bitcoin as a currency of crisis has unfolded with the tumultuous context of the Russian invasion of Ukraine. Nearly $70 million worth of crypto donations have been made to Ukrainians since February 2022. This figure includes $28.9 million worth of Ether, $22.8 million in Bitcoin, and $11.6 million of Tether, all transferred to digital wallets amidst the ravages of war. Notably, the majority of these funds were dedicated to providing vital humanitarian aid to those displaced by the conflict.

Additional direct funding amounted to approximately $56 million, all directed to a wallet address provided by the Ukrainian government for the purpose of bolstering that country’s wartime capabilities.

Further exemplifying the fusion of technology and generosity, a NonFungible Token featuring the Ukrainian flag was successfully auctioned for an impressive sum of $6.5 million.

As the world witnesses the tangible impact of cryptocurrencies on humanitarian causes and conflict zones, the practicality and efficacy of peer-to-peer permissionless payment systems are undeniable. The ability to bypass traditional financial intermediaries and ensure the swift, transparent, and secure transfer of funds has proven invaluable in dire circumstances. The Ukrainian case serves as a testament to the transformative potential of decentralized digital currencies, offering hope and support to those in need, even in the face of adversity.

Suppression of Bitcoin Adoption Bitcoin, as the pioneer cryptocurrency, has faced significant resistance from governments seeking to protect their traditional monetary systems. Governments often employ various tactics to suppress the adoption of Bitcoin, primarily through negative publicity campaigns.

Governments have utilized mainstream media to disseminate narratives that associate Bitcoin with illicit activities, volatility, and economic instability. By leveraging their influence and control over information channels, governments seek to deter potential adopters and erode acceptance.

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THE DEBAUCHERY OF CURRENCY They enact regulatory barriers, impose stringent reporting requirements, or outright ban the use of certain cryptocurrencies. Governments can and do target exchanges, financial institutions, and businesses that facilitate digital currency transactions, undermining the infrastructure necessary for widespread acceptance.

All of these things amount to a debasement of digital currency by striking at the indirect seigniorage and perceived quality held by those systems. If the past is any indication of the future, such debasements will result in terrible outcomes, both politically and economically, with bloodshed, poverty, and misery as consequences.

WHAT WE DO IN LIFE Debasement has plagued economies throughout history. However, an educated population that understands the detrimental impact of debasement can act as a bulwark against its consequences. New forms of money, particularly cryptocurrencies like Bitcoin, are designed to be resistant to debasement. Transparency in both monetary and fiscal policy reduces the potential for hidden manipulation or debasement. Financial literacy empowers individuals to recognize the warning signs, demand transparency, and hold authorities accountable. By raising awareness, we can demand a standard of good money as a means of promoting and preserving financial opportunity, growth, and security.

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APPENDIX A: MONETAE CUDENDAE RATIO APPENDIX A

Monetae Cudendae Ratio HOW TO MINT COINS

Debasement destroys countries, gradually and imperceptibly.

Unit of account.

Debasement is a fraud on the people.

Representative money.

Seigniorage.

Acceptance.

Counterfeiting countermeasures.

Divisible, Portable, Durable.

A

Nicholas Copernicus 1526

lthough there are countless plagues by which kingdoms and republics tend to decline, in my judgment these four are the most important: discord, mortality, land infertility, and currency depreciation. The first three are so obvious that no one can deny their existence, but the fourth, which concerns money, is only considered by a few and only the most thoughtful, because it destroys republics not in one sudden attack, but gradually and by some hidden reasoning.

Currency is a minted gold or silver coin used to count the prices of things bought and sold, according to the institution of any republic or governor. Therefore, currency is like a common measure of account.

However, that which is supposed to be a measure must always maintain a firm and constant standard. Otherwise, the order of the republic is necessarily confused, and buyers and sellers are defrauded in many ways, just as if a unit of length, volume, or weight did not keep a certain quantity.

Therefore, I consider this measure of account to be the currency itself, which, although based on the quality of its material, must still be distinguished from its face value. Currency can [carry a face value] higher than the material it is made of and vice versa.

However, the reason for the establishment of currency is necessary; for even though the exchange of goods could have been done only by the weight of gold and silver, since gold and silver are everywhere esteemed by the common consent of men, it was nevertheless established that money should be stamped with a public seal, to indicate that it contains a just amount of gold or silver, and that trust should be placed in its authority.

Currency is also often mixed, especially silver, for two reasons, in my opinion: first, to prevent the exposure of the fraud of those who would steal or forge it if it were made of pure silver. The second is that a mass of silver is broken down into small parts and scruples of coins, which attain a convenient size when mixed with copper. A third reason may be added, namely, that it does not wear out so quickly through continuous use, but lasts longer due to the support of copper.

The fair and equitable value of money is when it contains slightly less gold or silver than it is sold for, namely, the amount that was needed 123

THE DEBAUCHERY OF CURRENCY to cover the expenses of the minters only. For the sign must add some dignity to the material itself.

Money usually depreciates due to excessive quantity, for example, if so much silver is turned into coins that the mass of silver is more desired by people than the money itself. In this way, the dignity of the currency is lost when it is not possible to buy as much silver with the money as the money contains, and a greater profit is felt when silver is eventually turned into currency. The remedy is to no longer mint currency until it is equal to itself, and it becomes more expensive than silver.

The value of money is also distorted in many ways, either due to a lack of material alone, when more copper than necessary is mixed with the same weight of coins, or due to a lack of weight, even if it has a just amount of copper mixed with silver. Worst of all, it is distorted by both at the same time; and its value also decreases with long use, which is why it should be renewed and replaced. A sign of this is if silver is found in the currency in a noticeably smaller amount than it was purchased for, in which case a shortage of money is understood.

After discussing money in general, let us now turn specifically to Prussia, and show how it has fallen into such a state of debasement.

It is also referred to by names such as mark, Scot, etc., and there are also weight measures with the same names. For example, the mark of weight is the average pound. But the mark of currency consists of sixty shillings, which are all commonly known. But to avoid confusion between number and weight, wherever the term “mark” is used from now on, it should be understood as referring to number; and the term “pound” should be taken to mean the weight of two marks, and “mark” should be taken to mean the weight measure.

We found in ancient records and literary monuments that under the magistracy of Conrad de Jungingen, that is, just before the Battle of Tannenberg, a selibra, that is, a mark of pure silver, was bought for two Prussian marks and eight Scottish marks, when a fourth part of bronze was added to three parts of pure silver. From a pound and a half of its mass, 112 shillings were made. By adding a third part, which is 37 and a third shillings, the total sum becomes 148 [and two d.] With one pound of this, there will be two-thirds of a bezant, that is, 32 Scottish marks of silver, which undoubtedly contains three parts (and is half a pound of pure silver). But it has already been said that its price was 140 shillings per selibra. The remaining nine and a third shillings was supplemented by the face value of the coin. Therefore, its face value was appropriately consistent with its value.

Coins of this type are those of Henry, Ulric, and Conrad, which are sometimes still found in treasuries. Then, after the defeat of Prussia and the aforementioned war, they appeared more and more in coinage.

For the shillings of Henry, although similar in appearance to those mentioned above, are no longer found to have more than three-fifths of

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Seigniorage.

Inflation by excess money issuance.

Frederick the Great, a Prussian like Copernicus, learned this lesson when others did not.

Currency debasement was used to pay war debts.

APPENDIX A: MONETAE CUDENDAE RATIO

Bad money replaces Can yougood. keep track of all this?

New coins, old coins, and the old and new ratios of each to another, some with the same name, all in circulation at the same time? Imagine how the Prussian people felt. No wonder their economy was a hot mess!

The government made a monetary policy error by fixing 1 groat = 3 shillings, when a groat was really worth less.

silver. And this mistake continued to grow until it was begun to mix a fourth of bronze with three parts of silver in reverse order, so that it was rightly called not a silver coin, but a copper one, but its weight still retained 112 shillings in a selibra. However, since it is least appropriate to introduce new and good money with the old one remaining inferior, how much more was this wrong to introduce a new, inferior one, and not only infected the old one but, so to speak, conquered it. While under the magistracy of Michael Rusdorff they wanted to avoid this mistake and return the currency to its former, better state, they minted new shillings, which we now call groschen; but since the old, inferior ones could not be abolished without loss, they remained with a significant error.

And two old shillings were exchanged for one new one, so that a double mark of new and old shillings, sixty each, was presented to the people. The new ones were worth eight marks of pure silver for sixty librae, while the old ones were worth only six marks of pure silver for sixty librae. However, the obols remained in their use. Thus, for an old shilling, only six were exchanged, but for a new one, twelve. For it can easily be inferred that a shilling was worth twelve obols from the beginning. And just as fifteen is commonly called mandel in quantity, in most German territories, the word “schilling” endures for the number twelve.

However, the name of the new shillings persisted until our memory; how they eventually became groschen will be discussed below.

Therefore, the new solid coins contained eight marks of pure silver per sixty pounds, as is clear from their composition. For they consisted of half brass and half silver, and eight marks of these were worth almost two pounds. In ancient times, as has been said, they were equal in weight to the new ones, but only half as valuable. For since they contained only a quarter of silver, sixteen marks of pure silver were worth four times as much. Later, when the power to mint coins was granted to the cities and a new privilege was executed, money increased in quantity but not in quality. And so one-fifth of the value of the coin was lost in a mark. Afterward, when the new solid coins disappeared and the Scots themselves were accepted by the mark, it was decided to recall them by the estimate of the groat, that is, at three shillings per coin, a gross error and a very unworthy decision of the nobles, as if Prussia could not exist without them, even though they were not better than fifteen-penny coins then in circulation, when the multitude itself was already pressing on the value. Thus, the groats and the solid coins disagreed, being worth a fifth or sixth part less than what was established and by a deceitful and unfair face value detracted from the dignity of the solid coins. Perhaps the injustice should have been vindicated in such a way that the solid coins forced the groats to become Scots. But alas, Prussia, you suffer the penalty of a badly administered state. Thus, as the estimate and the value of money disappeared everywhere, production of coins did not completely cease, and a worse one was always introduced, which oppressed and

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THE DEBAUCHERY OF CURRENCY extinguished the goodness of the previous one, as long as the estimate of the solid coins corresponded proportionally to the value of the groats, and twenty-four light marks were given for one pound of silver.

However, at least the remains of such a valuable coin should have remained by now, since there has been no consideration of its restoration. But the practice or permission of adulterating, embezzling, and defiling money could not cease, nor does it cease to this day. For what condition it later appeared in, and what state it is now in, it is shameful and regrettable to say. For today it has collapsed to such a degree of worthlessness that thirty marks barely contain one pound of silver. But what remains if it is not helped, except that Prussia will have nothing but copper coins in the future. Hence, foreign imports and all trades will soon perish. For what foreign merchant will want to exchange his goods for copper coins? And who among our people will be able to buy foreign goods with such currency in foreign lands? Yet those who are affected by this tremendous disaster of the Prussian Republic contemptuously despise it, and they let their sweet homeland, to which they owe not only the most duty after piety toward God but also their lives, slip miserably through their supine negligence day by day.

It is very difficult to raise the Prussian currency to its former glory, and after such a downfall, it may even be impossible. Moreover, repairing it would be a task of great difficulty, but it seems that it can be conveniently restored to the conditions of these times, so that at least it returns to a value of 20 silver marks per pound of silver, by this method: for every three pounds of copper, one pound of pure silver is taken, minus half an ounce, or whatever amount is needed for expenses. A mass is made from which 20 marks are obtained, which will be worth one pound when purchased, that is, two marks of silver. The same method can be used for the production of shillings and pence, as desired.

ON THE COMPARISON OF SILVER TO GOLD The above statement was made that gold and silver are the base on which the goodness of currency resides. And it has been explained that silver coins can also be largely converted to gold. It remains to explain the ratio of exchanging gold and silver transversely. First, it is necessary to investigate what is the ratio of the appreciation of pure gold to pure silver, so that we can descend from the general to the specific and from the simple to the complex. Moreover, the same ratio applies to impure gold and silver, which are marked at the same degree, and again the same ratio applies to marked gold and impure gold and to marked silver and impure silver at the same degree of mixture and weight.

The purest gold found in our currency is the Hungarian florin, for it has the least admixture and only as much as was necessary to cover the expenses incurred in minting. Thus, they are properly exchanged for

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Currency was repeatedly debased, which “extinguished the goodness” of the earlier coins. This is the origin of Gresham’s law, “bad money drives out good.”

Copernicus thoroughly castigates the monetary policies of prior and current governments and rightly warns of lasting and severe economic consequences.

Bear in mind, this treatise was written at the request of the King and presented to the Prussian Diet (parliament).

APPENDIX A: MONETAE CUDENDAE RATIO

Copernicus, medieval astrophysicist and master of sharp sarcasm!

pure gold at the same weight, with the dignity of the seal supplementing the deficiency of the florins. Therefore, it follows that the ratio of pure silver to pure gold is the same as that of impure silver to impure gold and the same as that of impure silver to Hungarian florins, with weights not changing.

Now, Hungarian florins weighing 110 just and equal grains, specifically 72 grains filling one pound (I always mean a pound that contains two mark of weight). By this argument, we have found that one pound of pure gold is worth as much as twelve pounds of pure silver. However, we have also found that eleven pounds were once established for one pound of gold, which seems to have been established in ancient times so that ten Hungarian gold coins would weigh one-eleventh of a pound. If the same price were to last today at that weight, we would have a ready conformity of Polish and Prussian currency according to the above explanation. For about twenty marks would be made from one pound of silver, precisely two marks of gold instead of forty Polish groszy. But after it was established by usage that twelve parts of silver should be for one part of gold, the weight disagreed with the price, so that ten Hungarian gold coins would redeem one pound of silver and one-eleventh of a pound. Therefore, if twenty marks are made from one pound of silver and its one-eleventh, Polish and Prussian currencies will be equated by direct proportion, grosz to grosz, and two marks of Prussian currency for one Hungarian gold coin. But the price of silver will be eight and a half marks and ten shillings, or about that amount, for each selibras.

However, if the cheapness of currency and the destruction of the country is indeed pleasing, and if the restoration and adjustment of so small an amount will seem too difficult, and if it is seen fit that fifteen Polish groszy remain for one mark, and sixteen Scottish groszy for one Hungarian gold coin, this will also be easily done by the methods mentioned above if twenty-four marks are made from one pound of silver.

This actually happened recently when twelve marks were still the price for each selibras of silver and were exchanged for so much money in Hungarian florins. These examples were given for illustration and as a guide. For there are countless ways to establish currency, and it is impossible to explain them all, but the common consensus can define this or that according to what seems most suitable for the commonwealth. And if the currency corresponds well to the Hungarian florin and no mistake is made, other florins will also be assessed according to the content of gold and silver for their comparison.

This is sufficient for me to say about the restoration of currency, so that it is understood in what ways its value has fallen and how it can be restored, which I hope is clear from the above.

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THE DEBAUCHERY OF CURRENCY

EPILOGUE ON THE REVALUATION OF CURRENCY Regarding the maintenance and preservation of currency, the following should be considered: First, the currency should not be changed without the mature counsel and unanimous decree of the nobles.

Second, only one place for the mint should be designated, if possible, where the currency would be made not in the name of one city but with the emblems of the whole country. The effectiveness of this sentiment is demonstrated by the Polish currency, which retains its value solely for this reason in such a vast territory.

Third, the old currency should be prohibited and abolished when the new currency is introduced.

Fourth, it should be inviolably and perpetually observed that only twenty marks of pure silver are made from one pound, minus the expenses of the workshop. Thus, the Prussian currency will be proportionate to the Polish currency, so that twenty Prussian and Polish groszes together will make one Prussian mark.

Fifth, excessive currency should be avoided.

Sixth, the currency should be produced in all its denominations: that is, Scots, groszes, solidi, and oboli should be minted together.

As for the extent of the admixture, whether groszes and solidi should be made, or even silver denarii that are worth a third or a half or even a whole mark, it is up to those concerned, provided that a decision is made so that it remains in perpetuity.

The value of the oboli must also be taken into account, as they are currently worth very little, so that a whole mark barely contains more than one silver grosz.

Finally, the difficulty arises from contracts and obligations made before and after the currency innovation. A way must be found to prevent the contracting parties from being burdened too much, as was done in the past, as is evident from the descriptions on the other side of this sheet.

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Sameness means fungibility; fungibility promotes acceptance; acceptance drives value.

Let good money drive out bad.

This is what Frederick the Great would do centuries later.

Avoid inflation by implementing artificial scarcity.

Redenomination is a matter of convenience, but changing the denominations all the time is very inconvenient.

GLOSSARY GLOSSARY barter Direct trade of goods and services without the use of a medium of exchange. bimetallic currency system Two metals, typically gold and silver, are used to establish a fixed rate of exchange between them. cash equivalent Money-like instruments that are easily exchanged for legal tender. central bank The primary authority re-sponsible for overseeing a country's monetary system, managing its currency, and controlling the supply of money and credit in the economy clipping Removing metal from the edge of a coin. coinage group Elements with physical properties favorable to minting. coincidence of wants Two parties each possess something that the other desires and are willing to ex-change with each other. It is a necessary condition for barter. coin of account A unit of measurement used to express the value or price of goods and services. It is not necessarily the physical coin used to make actual transactions. A base currency. Unit of account. commodity money A physical element that has value in and of itself while also being used as a medium of exchange. currency A specific form of money tied to a particular jurisdiction. debasement Any reduction in the value of a currency; an erosion of the store of value function of money. direct seigniorage The profit earned by the issuer of a currency when the face value exceeds the true value. exchange rate The price of a currency. Currency is unique in that its price is always expressed in some other currency. feedback loop A persistent cycle of users joining large networks and large networks attracting more users. fiat currency Money whose value is based on legal authority. fiduciary currency Money whose value is based on the agreement or faith of the trans-acting parties. fractional reserve banking A banking system in which banks are required to hold only a portion of their customers’ deposits while lending the remainder. fungibility The property of a sameness that makes one item perfectly interchangeable with another identical item. gold standard Currency value directly linked to a specific quantity of gold. indirect seigniorage Benefits that accrue to a country’s economy as a result of its currency being widely used and accepted outside its borders. inflation Any increase in the price of goods or ser-vices resulting from an increase in the supply of money and/or a decrease in the supply of goods or services.

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THE DEBAUCHERY OF CURRENCY ledger A permanent record of financial transactions. lock-in The inability to leave a net-work because of resulting economic harm to the user leaving. medium of exchange Any item widely accepted in a particular society or market as a means of payment for goods and services. minting A standardized process for creating new coins from raw materials. mint ratio The assigned exchange rate between gold and silver coins. money-like Having characteristics of money but not legal tender. money supply The total amount of money available in an economy. It includes physical currency and bank deposits. network effect A rapid increase in the value of a network as it gains users. noble metals Elements that are highly resistant to corrosion and oxidation. petrodollar system The international monetary arrangement in which oil-producing countries receive payment for their exports in U.S. dollars. representative money A fungible claim on a commodity or commodity money. reserve ratio The percentage of customer deposits that banks are required to hold as reserves Schelling point A focal point where people tend to converge without intentional coordination. specie Money in the form of coins made of precious metals. store of value over time.

Any exchangeable item that maintains its purchasing power

token money Money that is not based on the value of the material that it is made of, but rather on the faith and trust that people have in the issuing authority. Representative money. unit of account prices.

A standard measurement or denomination for money and

work Labor and/or information necessary to obtain a scarce resource.

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