Wait, what? 1971? The year when Nasdaq was founded? How can it even be related to crypto? Those are all reasonable questions, caused by the article’s title, but today we are here to share a material, quite unusual for our blog. A bit of economics history is never redundant for any trader or DeFi user, especially when the discussed event is directly related to Bitcoin’s introduction in 2008. So, let’s jump straight into it. 🐇
(Disclaimer: the phrase “Gold reserve” will be used for around a billion times in the article, so we do not recommend it for people allergic to repetitions)
But what happened in 1971?
One of the most influential finance related events of the 20th century took place a couple decades before that year - to restore the badly damaged world economy, suffering after the Second World War, in 1944, representatives of 44 states that were part of the Anti-Hitler coalition adopted an agreement on a new monetary system, called Bretton Woods. 🪵
The new system was based on fixing the price of gold ($35 per troy ounce) and exchange rates of the participating countries, set in relation to the key currency of that time - the US dollar. The binding was due to the fact that even then the United States economy was the largest and least affected by the war as well as the USA being the holder of the biggest gold reserves. Even though Breton Woods was said to be a counterpart of the “Gold standard”, currency prices were still determined by the home country’s gold reserves. 🤦♂️
The instant economic growth caused the FRS (Federal reserve system) of the US to print more currency, not letting the gold reserve increase to keep up, so by 1969 the overall dollar emission surpassed the gold supply by 4 times. That made exporting goods from the USA extremely expensive, whilst also destabilizing the US economy. 😵💫
This caused the countries participating in the system to leave it one after another. FRG was first, Switzerland followed, the rest began to slowly exchange their dollar reserves for gold, preparing for the incoming collapse. ⏳
And, apparently, they weren’t wrong. Richard Nixon, who was elected as the US president in 1969 had been working on a dollar devaluation plan, which was brought to life in 1971 finally separating the dollar from the gold reserves. The act was then called “Nixon shock”. That wasn’t just useless, that exacerbated the situation and during the 1970s US was facing stagflation - a process of devaluing the currency due to the lack of financial growth, consequently increasing the level of unemployment. Ronald Reagan, being the next president tried cutting taxes, hoping for businesses to recover, whilst also focusing on building up the military apparatus. 🪖
Although the two were able to fight back unemployment and inflation, the USA was now the biggest debtor, having tripled the amount of money borrowed by 1988. 📈
The repercussions were still to come in 2007, making the debt a reason for the 2007-2008 mortgage crisis starting in the USA. And that is when we get to Bitcoin. 🪙
How is crypto involved?
Satoshi Nakamoto released Bitcoin as a reply to the collapse happening in the world at that time, trying to show people that the concept of “Gold standard” might still be an option - the right one, probably. In their forum posts and letters, the future creators of the cryptocurrency mentioned economists like Ludwig von Mises, who supported the gold standard and opposed the principle of fractional reserve banking. The creator of bitcoin might also have been inspired by Friedrich Hayek and Murray Rothbard, who developed the concept of private money. 🔒
Just in case anyone doesn’t know:
Who is Satoshi Nakamoto?
Satoshi Nakamoto is the pseudonym of the person or group of people who developed the bitcoin cryptocurrency protocol and created the first version of the software in which this protocol was implemented.
Concluding the previous idea: Bitcoin was supposed to become the solution for the crisis that criticized the government’s ways of dealing with it.
“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.”
(c: ) Satoshi Nakamoto
Stay tuned 📻