In the 1970’s, The United States Dollar (USD) was removed from the gold standard (meaning that while on the Gold Standard, every USD in circulation was linked to the value of gold, thus making your money as good as gold). After its removal, the dollar became linked to only one thing: Trust. Trust that the Federal Reserve was not going to over-print the currency into extinction. This trust did not only apply to the citizens of the United States, but to 65 other countries that peg their currency to the U.S. Dollar (Investopedia, 2020). During the Bretton Woods Agreement of 1944, the U.S. Dollar became the global reserve currency, mainly due to its link to gold. However, now that the gold standard was dropped, a signal was sent to the countries who had been tying their currency to the U.S. Dollar that they could now print money at their own discretion. This was because now that the U.S. Dollar was not attached to anything, neither was their currency. As for the U.S., it became up to the Federal Reserve to determine the value of the dollar. Today, although the Federal Reserve claims that inflation is steady, the debasement of the United States Dollar is far greater than most perceive and will impact the working class the most as their hard earned savings will struggle to keep their value. Still, hope can be found as we have entered the age of a debase-less cryptocurrency: Bitcoin.
Before I explain what Bitcoin is and how it presents an alternative to inflating fiat currencies, I will dive more into currency debasement and why this wicked problem occurs.
A currency gets debased when the purchasing power for one unit of that currency decreases due to the increase of money supply. The “debasing” of currency originated in the days of gold and silver coins, when a government would add base metals into the mix of precious metals so that they could create more currency (Investopedia, 2020). The main reason countries have debased their currencies is to increase the money supply to fund either a war or meet their financial commitments. Debasement of currency is another way countries can raise money without taxing their citizens, although inflation can be considered a hidden tax as the government is devaluing those same citizens' money.
However, there are many economists, such as those at the Federal Reserve, who believe that inflation can be a good thing if used properly. The theory is that inflation is good when it is mild, one or two percent, because this makes consumers expect prices to rise. When consumers think prices will rise tomorrow they buy more today, thus increasing demand in the short term. This theory results in stores selling more now. An additional benefit of inflation is that it prevents the risk of deflation. Deflation is considered undesirable in an economy because it causes prices to fall, leading people to wait to buy goods as they want to see if the price will keep falling, in turn lowering demand and leading merchants to have to lower inventory and lay off workers (The Balance, 2020).
The issue with this school of thought is that people shouldn't feel a consistent need to spend their money, they should spend their money when they feel it is important to do so, not because their currency is constantly losing value. In this model people are forced to spend money, promoting a culture of irrational consumption. Again, this all occurs because of an increase in money supply.
As a currency drastically increases in supply and wages stay the same, the consumers buying power is diminished. A good example of how this impacts people would be retirement funds. A goal is set for the amount of money one needs to live the rest of their life without work and once the target is met that person retires. But let's say your goal is five hundred thousand USD and it will take you about thirty more years to reach that goal. Fast forward thirty years, having retired only to find that your five hundred thousand is actually only worth two hundred fifty thousand due to inflation. Now, you only have half the money you thought you needed to retire. Depending on the rate of inflation, this will vary, but the principle is the same: because of inflation many people end up retiring with less money than they thought would be available to them. Given this, what is the rate of inflation in the United States? It depends on who you ask!
If you look at the Federal Reserve Economic Data (FRED), a database run by researchers at the Federal Reserve Bank of St. Louis, you’ll find the inflation rate to be reported at around two percent on the Consumer Price Index (an approximation of the price of consumer goods and how they're trending) (SmartAsset, 2020). However, there are some economists who find this to be a misrepresentation of USD debasement as the real impacts of inflation can be seen in the M2 money supply (including cash, checking deposits, or assets that can easily be made liquid) and the rise in prices of certain goods and services. For starters, “Data from the Fed shows that a broad measure of the stock of dollars, known as M2, rose from $15.34 trillion (£11.87 trillion) at the start of the year to $18.72 trillion in September” (CityA.M., October, 2020). In other words, out of all the USD in circulation, eighteen percent was printed in 2020! This means that even if you were to loan your money to the bank at an eight percent interest rate (which would be unheard of) your money would still be worth ten percent less than it was last year. Additionally, inflation is represented in the prices of goods, although some goods are more important to consumers than others. For example, the price of goods such as telephones, computer software, and televisions have gone down by fifty to ninety seven percent in the past twenty years. On the other hand, in the same time frame the cost of goods and services that are considered to be more vital have gone up between fifty and two hundred twenty five percent, with housing and food at slightly over fifty percent, college tuition at one hundred eighty percent, and hospital services at a whopping two hundred twenty five percent increase in overall prices (see chart at bottom) (Bitcoin.com, 2018). This increase in prices of vital goods and services illustrates the diminishing buying power of the American people where it matters most. The Fed’s approximation of two percent, on the Consumer Price Index, are terribly misleading when trying to grasp the overall debasement of the dollar. Deceiving statistics such as this one are what make inflation that much more damaging, because not only are individuals losing value but they are also unaware of the true scope of the issue.
The reason this problem should be considered so wicked is because inflation is in many ways a type of theft. Currency only retains its value as a scarce commodity, so when the government decides to decrease the scarcity of its currency they are directly taking advantage of the citizens by stealing their value. Citizens being taken advantage of by the government when it comes to currency debasement is a story that is hundreds of years old. However, we have entered a new age, one of hope, in which an incorruptible currency controlled by no one has freed people from their monetary slavery and given them financial freedom! This currency is Bitcoin.
In January 2009, the world was introduced to the first “peer to peer electronic cash system” (The Bitcoin White Paper). With it came a currency that could not be controlled by anyone, not even world governments. The Bitcoin network is made up of computers all over the world that contribute to verifying transactions and are rewarded, in bitcoin, for doing so. These computers are referred to as miners and they are responsible for running the network. Just like the internet, anyone can use Bitcoin as well as contribute to running the network by setting up their own mining rig. This aspect of Bitcoin is what allows it to be peer to peer, and thus incorruptible. This incorruptibility is especially important as it allows the currency to remain scarce.
Bitcoin is set up in such a way that roughly every four years the supply of new bitcoin being minted by the network each day is cut in half, this event is referred to as the halving. For example, if one thousand bitcoins are entering the network every day, after the halving only five hundred will enter per day, and after the next halving only two hundred fifty, and so on. This makes it so that the new supply of bitcoin is only shrinking overtime, therefore making it increasingly more scarce, and thus more valuable. A maximum of 21 million bitcoins can exist, and nobody can change that. Compared to the U.S. Dollar and its inflation with no end in sight, bitcoin provides a far superior use case as a means of exchange, store of value, and global reserve currency.
Bitcoin uppercase B stands for the Bitcoin network and bitcoin lower case b stands for bitcoin the currency.
In a world where bitcoin is the global reserve currency, government run fiat money will only be an issue for those who choose to operate in it or are forced to do so. Citizens will be able to capture more value for their work and even perhaps retire earlier as their money will be gaining value rather than losing it. We seem to be entering an unusual time as the world's global reserve currency, the United States Dollar, is failing to keep its value at an alarming rate. Normally, this would mean disaster for the common people, but these are not normal times. Fortunately, the Bitcoin network by itself is enough to provide hope for millions of individuals around the world who have been exploited by their government's monetary policy. With the invention of Bitcoin, now these fears of disaster can be replaced with confidence in a decentralized system, created for the people, by the people.