Why was Bitcoin Invented?
Once upon a time, people used to pay each other in gold and other precious metals. It was difficult to transport and difficult to divide.
So, paper money was invented as a claim to gold in a bank vault. It was easier to transport and divide.
However, banks gave out far more paper money than the amount of gold they had in the vault. They ran on fractional reserves and it was a real money maker. But, this meant that every now and then banks collapsed because they couldn’t pay up.
Which is why Central Banking came into the picture. They would be lenders of last resort and risks on runs on the bank would be mitigated as banks could guarantee each other’s deposits through a central bank. However, even through the risk of a bank run was lowered it wasn’t eliminated. In fact, its frequency may have been diminished but its impact was increased as banks continued to remain insolvent in this fractional reserve scheme.
Banks would still get in trouble. But now, if one bank got in enough trouble, they all would be in trouble at the same time. The only way out would be if governments stepped in to save them.
Every tie between the financial system and gold was severed in 1971. Richard Nixon decided that USD would no longer be exchangeable for a fixed amount of gold. In essence, this created a ticking time bomb because there was the limit on the amount of paper money banks could create.
This was the moment when all money essentially became credit. Money was no longer supported by an asset. Banks just printed money and expected it to be returned to them with interest. Yes, they needed to keep adequate reserves but the reserves consisted of the same credit-based money and the reserves are much lower than the loans they lent out.
This led to an explosion in the money supply. The ECB currently reports a yearly increase of about 5% in the supply of the Euro
Which leads to a yearly increase in prices. The increase in prices is somewhat lower than the increase in the money supply because of increased productivity. As time goes by society gets better at producing, we use more advanced technology, better utilization of resources etc. So, you’d expect prices to drop every year wouldn’t you? The fact that they don’t is because of money creation.
What remains is an inflation rate in the 2% range.
Banks have figured that they can siphon off all productivity increaes and around 2% every year without people complaining too much.
They do this by increasing the money supply by about 5% a year and getting this money returned to them as interest.
As if this dastardly tax on society wasn’t enough. Every couple of years banks take society hostage. In case of a financial crisis, banks know the government will bail them out, or the system will collapse.
The digitization of traditional money is even worse. If this happens no two free men would be able to exchange money without a bank acting as an intermediary. If you believe that to transact with others is a fundamental right, this should scare you.
The lack of sound money was the root of the problem. We had to use paper money because there was no better alternative. Gold and silver still remain difficult to use.
There have been past attempts at changing the system. A private currency called the Liberty Dollar was launched in 2007. The initiative was shut down because it undermined the U.S currency system. The reason given was that an alternative could only thrive if no one could take ownership of it and there was no central point of failure.
A peer-to-peer electronic cash system was what was needed. This was what Satoshi Nakamoto described in 2009 in his whitepaper. It was a response to all the problems described above and was why he labeled the genesis block with the text: “03/Jan/2009 Chancellor on brink of second bailout for banks.”. Bitcoin was meant to be an alternative to our current financial system.