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Gate.io Blog: 50 Years Without the Gold Standard – A Reminder of the Importance of Bitcoin

26 August 12:01

By Bernabe.L, Gate.io Researcher

Source: Insider

In the wake of World War II, the financial system went through a series of changes in order to rebuild the ruined postwar society, promote international exchange and attain certain stability. The policies implemented in the Bretton Woods Conference in 1944 would introduce the denominated Gold Standard, which granted the US dollar the status of world reserve currency pegged to gold. In this case, a rate of 35 dollars to 1 ounce of gold. The guarantee of redeemable dollars for the precious metal granted the US currency an intrinsic value.

Fifty years ago, on August 15th, 1971, this whole system came to an abrupt ending as a result of the Nixon Shock. On that day, the President of the United States would forbid the convertibility of the dollar to gold, terminating the Gold Standard. This would be the culmination of a process where countries had started to lose their trust in the US dollar due to the inflationary policies in place, casting doubt over the amount of reserves in the US Treasury and ability to redeem dollars for their equivalent in gold.

Despite occurring decades before the appearance of Bitcoin, this event is crucial to understand why the first cryptocurrency came into existence.
The dollar no longer being backed by gold, the de facto fiat currency lacked any value beyond what the government could enforce through the (legitimate) use of violence. Krugman would later say “fiat money is backed by men with guns”, as a reference to the military power of Nation States.

With the ability to print an infinite amount of fiat through central banks and government bonds issuance, also known as Quantitative Easing, the financial system is prey to persistent issues with no solution in sight.
Government debt around the globe increases by the minute, reaching unsustainable levels that are unlikely to ever recover as every State has made borrowing fiat a routine exercise to fulfil their mandate. Such practices are akin to a Ponzi Scheme as the inflowing credit is necessary to cover even the most basic obligations generated by the ever increasing debt. In such a situation, if the money printer and issuance of bonds were to stop, the financial system would fall apart without severe restructuring.

The average citizen suffers the consequences of such practices through inflation, although it may not appear as evident on a daily basis. The exponential growth of circulating currency will progressively erode the purchasing power for goods and services. As such, the financial system is designed in a way to further increase the requirements to sustain the same standard of living over time.

Source: https://fred.stlouisfed.org/

The effects of inflation are often referred to as the “hidden tax”, or “tax on the poor'', considering that those with less resources will struggle the most given their inability to spare assets into inflation hedges or access positions that outpace inflation rates.
This situation was worsened by the coronavirus crisis and its consequences on a social, political and economic level. The amount of circulating dollars has reached heights never seen before, to the point that the Federal Reserve has ceased to publish the M1 Money Stock figures since last February. The fear of a hyperinflationary scenario is increasing, becoming a realistic and inevitable outcome for many.

Source: https://fred.stlouisfed.org/

As mentioned earlier, understanding the current financial system is key to grasp the importance and value of Bitcoin. It is not a coincidence that such technology appeared following the 2008 crisis and the very own genesis block contains a reference to this context: “The Times 03/Jan/2009 Chancellor on the brink of second bailout for banks”.

The increasing lack of trust in public institutions and their ability to offer durable solutions are fertile ground for the expansion of a new structure that promises the end of the trust-based financial system. Being able to transact on a trustless network with cryptographic proof removes from the equation the core issue of relying on a third party and financial institutions, who happen to be the root of much of the problems. Under such a premise, no entity would be able to monopolize the currency, effectively enforcing the separation of money and State.

The technical characteristics of Bitcoin are all designed to ensure such results. Its limited supply to 21 million, distributed ledger system that guarantees decentralization through incentives, security and transaction irreversibility all seem to have been chosen to be the opposite of the fiat system.

After over a decade, blockchain technology has evolved and grown to a point were it is possible for anyone to live under “the Bitcoin Standard”, independant from the pressure imposed by fiat. The vast array of financial products and services available to such end are evidence of a paradigm shift in the way society perceives and interacts with money.

The ramifications of Bitcoin and crypto coin go beyond replacing the prevailing system. In certain cases, it will actually give many people the option to participate for the first time in the globalised economy, something unattainable under the old regime. The most evident case is the recent adoption of Bitcoin as legal tender in El Salvador, a country where 70% of the adult population does not have access to traditional banking. The decentralized nature and lack of infrastructure requirements to make use of Bitcoin is the answer to many underdeveloped or isolated regions.

Beyond the market speculation regarding Bitcoin's valuation in fiat currency, one should be reminded of the core message of its Whitepaper: Bitcoin is simply an option for anyone who wishes to opt out of a broken system, and venture into the self-contained technology of sound money. Will you take the leap?

*This article only represents the views of observers and does not constitute any investment advice.
*The content of this article is original and the copyright belongs to Gate.io. If you need to reprint, please indicate the author and source, otherwise legal responsibility will be pursued.

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