READ ME: Reddit is trash and won’t tell me why my post won’t send despite it being within character limit, so I’ve cut it in half. This is part 1. Part 2 in comments, please upvote the comment so the post is clear. Thanks.
Start: (1/2)
One thing gold bugs and Bitcoiners/some crypto ‘believers’ agree on is we need a better monetary system as fiat currency is being created at will to finance ever growing spending. This money creation is a continuously growing hidden tax on the countries citizens who get poorer and poorer as a result. Governments and banks have shown time and time again they cannot be trusted not to debase the currency. Where these groups disagree is solutions. I’m going to explain why a return to a gold standard is not a solution, infact, it is what has gotten us into this mess to begin.
I will be using US specific examples but it’s not a country dependent phenomenon, the same debasement strategies take place globally. Gold is a great SoV but it is not very portable and extremely difficult to settle large amounts and long distances. This led to the creation of paper gold receipts by banks which could be used to redeem gold from their vaults. This solved the portability problem but it created another in its place. Bankers quickly learned that only a small percentage of people would redeem their notes at any given time of normal operation. This gave them an idea, lets print more notes than we have gold so we can make more money! As long as they don’t get too greedy nobody will ever notice, right? Well, that may have been true, too many got greedy and unexpected events would expose their schemes when too many people tried to redeem their notes at once and found empty vaults. Human nature has shown us time and time again when money and competition is involved there is no limit to greed.
Banks are like any other business, they compete and desire for profit. In the 1800s a bunch of new banks were popping up competing with established city banks, these new banks were known as country banks. These country banks issued far more currency to their gold reserves than their established city counterparts. This led to increased profit for them and these notes were ending up at city banks who were redeeming them at face value, taking a technical loss if all were to be redeemed at once. Quickly the city banks gold vaults were being depleted and they were sitting on piles of country bank notes. Since there were so many more of these country notes they began to greatly outnumber city notes. The city banks eventually said we will no longer redeem these notes. This led to the creation of brokers, notably the Suffolk bank who would purchase these notes at a discount from the public and redeem them at the issuing bank in bulk. They wanted to buy these notes up, redeem them at the issuer bank to get them out of circulation so their better capitalized notes were more used. To their shock, the more they purchased and redeemed, the more were created by the country banks. The problem got worse! This led to a consortium of city banks in 1824 who tried to leverage their power to make the country banks behave more honestly. They demanded the country banks store gold reserves in their vaults to make redemption easier and keep them honest. This angered the country banks they were making so much money printing money out of thin air and didn’t want to stop. But, if the country banks didn’t play along they would be shunned by the more legitimate banks and people may stop trading with their notes, an even worse fate. The country banks tried to lobby congress to make the Suffolk bank consortium stop. The effort ultimately failed, but they would keep fighting to print unbacked notes. [as a side note, every bank was overprinting, even the more legitimate city banks, the country banks were just more reckless] Once again, the city banks attempt at keeping country banks more honest failed. Because the city banks were redeeming the country notes at par, the country notes gained more respectability and trust with the public. People considered them as good as city notes. Due to this country banks printed even MORE.
You may start to notice that the most dishonest banks have the advantage. Either they just fail and go bankrupt or they dominate the economy and more legitimate banks prop them up. So why were people even using these banks? Well they would give out super cheap loans in unbacked currency people thought was actually backed. In Massachusetts only 38% of the circulating money supply was city notes at this point. The public was getting screwed and robbed either way, just less so with city banks. Both the city banks and country banks were making enormous profits through this enterprise, ultimately it will be at the publics expense. Interest compounds, if a country bank inflates their money supply by 10% YoY in 10 years the unbacked notes in circulation will be 150% greater. When every bank, city or country is inflating their money the system has to come crashing down eventually. Banks failed at enormous rates in the 1800s, even the Suffolk bank stopped redeeming their own notes at the outset of the civil war. The citizens who held bank notes were the ones who paid the price as they became worthless overnight. This led government to pass the National Bank act of 1863, forbidding private banks from issuing currency. Now only government could issue notes, but is government immune to the same human desires that created this mess? We can safely say no with the hindsight of time. Just a few years later Lincoln was creating enormous amounts of unbacked paper currency (greenbacks) to pay for the civil war and the south was doing the same with confederate dollars. This is the beginnings of the system we have today.
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