World War I to Bitcoin
I originally wrote this piece in October, 2020 after reading When Money Dies, The Lords of Finance, and thinking how everything leading up to our current situation started in the summer of 1914, and wanted to share it again because for a lot of us, the why of bitcoin goes much deeper than laser eyes.
The world broke itself beyond repair in 1914 due to a series of miscalculations by politicians and bankers, and everything since - WWI, the social volatility of the 1920s, economic depression of the 1930s, World War II, and 70 years of American Hegemony - was really the world set adrift in the wreckage of the last age, trying to find a way to cope with their incredible strategic blunder from tearing their world apart and ending the gold standard by sheer accident. - RC
Central Bankers and the Taliban
Central banks are currently working on their own digital currencies. Like a narcissistic James Bond villain telling us their diabolical plan while we lay strapped to the table and a laser slowly moves to kill us, they clearly explain their end goal is deeply negative interest rates.
They originally wrote their IMF staff study on how negative interest rates work in 2018, and recently in 2021 now say,
“The evidence so far indicates negative interest rate policies have succeeded in easing financial conditions without raising significant financial stability concerns.”
There is zero difference to me between the Taliban trying to kill me in Afghanistan and central bankers punishing me with negative interest rates.
Only the rate at which they try to steal years of my life is different.
The Taliban at least risked their own life to try and steal mine at 2,350 feet/second from the muzzle of an AK.
Central bankers think they can drain the world of life like necromancers at negative 4% per year from their vaunted positions in a fading Epoch with no risk.
But as in all Ages before us, these financial wizards will be humbled as the lights go out in Rome and the Gods of the Copybook Headings return.
You may completely disagree with all of this, or be completely new to bitcoin, and watching it close in on $13,000, are wondering if you should buy some.
This is not a story about how to get started in bitcoin. This is the story of why I buy bitcoin in the first place, which is tied to my belief human nature is constant.
As Mark Twain said, “history doesn’t repeat itself, but it often rhymes”
So lets look at decisions made by past bankers, politicians, and economists to keep in mind as we go forward into an unknown future.
Prussia, 1871
By 1870, the globe had already been neatly divided up in the Great Game of geopolitics between the old empires of Britain, France, and Russia.
There were no new lands to conquer for a newly unified German empire in central Europe now building warships and quickly industrializing unless one of the old empires fell.
The British and Russian empires even drew Afghanistan with a shallow sliver of land going to China, just to prevent the two great empires from sharing a border and having any misunderstandings escalating into all out war.
The late 19th century was a time when every developed nation was on their own gold standard. A world we have never known, where every advanced economy and central banker valued a strong currency.
While there were market swings with economies on the gold standard — it was hard to move gold around to meet liquidity requirements when there was a shortage — the 19th century had been one of large economic expansions, not only had the United States expanded west, but countries had built railroads, industrialized, and the Suez Canal had been completed further connecting global trade.
Leading economists at the time said war had been forever banished from the earth, because it would be economically devastating to wage war on trading partners. They were correct in how devastating the first industrialized war would be, but wrong to assume the world is a rational place or every nation would act in their economic best interest; some things trump money.
It was seen as a point of national pride when a country was able to join the other modernizing countries of the world by pegging their currency to gold and maintain enough gold reserves to make their currency strong.
Gold reserves served an important diplomatic and military purpose. Large gold reserves was the atomic bomb of deterrence for 19th century empires.
This was due to the “modern economic fact” in the 19th century that countries could not sustain military expenditures once their gold reserves were exhausted.
If a diplomatic solution wasn’t found in a dispute, the country with the largest gold reserves was confident they could outlast their opponent in military spending during the ensuing war, and after victory, hand their defeated foe a bill for the war damages, while also expanding trade and geopolitical dominance in the newly acquired territory which was added to their empire.
In 1905 and 1911, Germany clashed with France diplomatically over northern Africa aspirations in Morocco.
Both times the Kaiser failed to not only break up the Triple Entente, as both Britain and Russia backed France, but to add to the defeat, the Keiser’s bankers told him Germany could not afford a war as their gold reserves was not large enough.
As a result of Germany’s perceived humiliation in Morocco at the hands of the French, the Kaiser immediately ordered for Germany’s gold reserves to be built up to the largest in Europe, which lead to the Kaiser’s confidence in backing Austria in the summer of 1914, starting World War I.
June 28, 1914 - Sarajevo, Bosnia and Herzegovina
An hour before Archduke Ferdinand was assasinated, a grenade had been thrown at his car. Driving down a road which became too narrow for the car and having to back out to another street provided another anarchist, who was drinking espresso at a nearby coffee shop, the opportunity to walk up and kill both the Archduke and his wife with a single shot each from a .380 pistol.
Following the assassination, leaders, politicians, and bankers in Europe were meticulous to not have their actions appear out of the normal from their typical summer plans and intentionally mislead news reporters so the general population remained unaware how quickly the continent was sliding towards war following the Archduke’s assassination.
Media either not knowing or not reporting what is really going on in the world is not new. It is a very old geopolitical game.
As an interconnected world proceeded to rip itself apart in the summer of 1914, people who didn’t have ample liquidity to meet debts suddenly found themselves being turned down by banks and ruined financially as they were forced to declare bankruptcy and sale assets at any price for liquidity.
This happened extremely fast.
Four weeks after the Archduke died, millions of men were under arms and marching to the battlefields of the Great War. The first industrialized world war would be so awful it would tear societies apart, topple ancient empires, and shatter the very foundations of their Age beyond repair.
The End of the Gold Standards of Europe
Gold reserves were essential to national defense strategy, so the central banks quickly suspended gold standards and refused to pay withdrawals or allow lending in gold as the war started in earnest in the summer of 1914.
It is just a different level of math and risk management. The promises made by a bank to an individual doesn’t matter to politicians who are weighing it against millions of lives and the continued existence of the nation.
Anyone caught on the wrong side of this math, like people wanting to withdraw their savings from the bank in gold in the face of world war is just on the wrong side of much larger geopolitical forces. While unfortunate, that is reality, and why it is important to me to maintain ample liquidity at all times.
The French lead, banks quickly suspended their gold standards, refusing to pay out savings to people in gold, only paper currency.
Governments across Europe all followed, abandoning their gold standards in the face of world war as global trade seized and demands from people wanting to withdraw their savings in gold could not be met since physical gold wasn’t exactly easy to transport.
The sheer amount of logistics planning and transport France put into transporting and securing their gold reserves was incredible. In a way, looking at this time in history gives a different perspective on the energy and transaction costs that goes into maintaining the bitcoin network.
What was the cost of banks emptying gold vaults in Paris, afraid the German army would break through their lines?
The front was close, the fighting could be heard in Paris. In fact if you’ve ever had a French 75 cocktail, that was invented in Paris during the war because it was so strong, it was said to hit a person like a French 75 artillery round.
Some of the fiercest fighting the planet has ever seen happening miles away, and the French are inventing a new cocktail and naming it after artillery rounds because of how strong it is. Got to love how the French love life.
But imagine the logistics of such an operation to move gold reserves.
The thousands of men, the security preparations to empty bank vaults around Paris, transport the gold to the waiting trains which had been arranged and tracks cleared. Load, station armed guards to ride along as the trains pull out of Paris to a new, secret, prearranged location by the French government.
Then unloaded and safely stored for government use to finance the war. Later on as the war drags on, it is loaded, transported to the coast, transferred to a ship, and steams across the ocean to America to pay for warfighting materials where it sails past the Statue of Liberty, docks in New York, gold is again craned off the ship, loaded on trucks, driven to the vaults of the Federal Reserve, offloaded again, moved to the vault, stacked and physically counted, then tallied in a physical ledger by a clerk.
Next add in the social cost to people who couldn’t withdraw their savings in gold and the volatility that caused in their personal lives. People received paper money which the government devalued by 50% throughout the war, increasingly bought fewer goods as rations took effect and people dealt with incredible hardship.
It is reasonable to bear those prices in mind when considering the cost benefit of maintaining the bitcoin network.
As for bitcoin requiring power and the internet to function, look around our modern world. Most people have less $200 cash on hand (89%) and 69% have less than $1,000 in savings for an emergency.
Whether we like it or not, the lifeblood of modern life is already the power grid, internet, and credit cards. If power and internet goes down, bitcoin will be the least of our concerns, most Americans won’t be able to buy food or gas past a few days without power.
All The Financial Wizards Were Horribly Wrong
The brightest, most learned politicians, economists, and bankers of the time in 1914, on both sides of the growing conflict, were all confident in estimating the war would be short.
Even Germany, they reasoned, with their massive gold reserves, only had enough gold to last a little over year in all out conflict.
As entire mountaintops were being blasted into oblivion under timed artillery strikes numbering in the thousands in France, men and horses drowned in mud or were cut down like chaffs of wheat under the steel rain of interlocking machine gun fields of fire, and the death tolls from battles numbered in the hundreds of thousands, it never occurred to the brightest economic minds of the time that empires would continue to fight long after their gold reserves were exhausted.
This isn’t a condemnation against these men who assumed when the number read zero in the gold reserves ledger the machine guns would fall silent in France.
It is a stark reminder just how wrong those can be who are at the very top of their game in politics, banking, and economics.
We should be humble about the certainty in which we judge certainties in our world.
If every central banker, politician, and economist could be that horribly wrong in 1914, they can certainly be that wrong in 2020 about the path to prosperity being paved in negative interest rates.
In the grim reality that followed this tragic miscalculation in 1914, nations money supplies at least doubled throughout the war, taxes and debts increased, and when the smoke cleared over no man’s land in 1918, a broken Europe was left adrift in debt, a dead and shattered generation, social unrest, and broken economies.
The world never recovered monetarily from World War I.
The Last Of The Gold Standards
By 1918, the world was a very different place.
Russia, suffering heavy losses in the war against an industrialized German army fell to a small group of Soviet radicals who successfully used the crisis to first gain power, kill Nicholas II and his family, and then in the civil war and purging that followed, killed 10 million of their countrymen and forcibly starved to death another 10 million in the now communist USSR.
This would be the start of communism, the ideology of guaranteed outcomes, killing 100 million people in the 20th century.
Guaranteed outcomes…doesn’t sound so different than central bankers and politicians now deciding who the winners are with crony-capitalism.
England and France, losing millions of men in the war who would not return to jobs in their economies, facing massive war debts to the United States, and wanting to stave off a depression, focused on extracting every ounce of wealth they could from the German and Austrian civilian populations after the war.
The debt was so great from the war, it would dominate world politics and banking summits for the next two decades, right up until the resumption of hostilities in World War II.
By 1925, seven years after the war ended, Britain and a few other countries tried to return to the gold standard, but it was not to last.
After a few years of stability, the Great Depression hit and a bank failure in Austria in 1931 spread first to the Austrian central bank and onwards to Britain where there was a run on the banks, effectively ending the gold standard for Britain forever.
After 1931, the United States would be the last, although greatly devalued, gold standard left standing in the world where only 17 years before, every developed nation on earth had prided itself for being on a gold standard.
The Tragedy that was the Weimar Republic
In Germany, the harsh war reparations made it not only impossible to return to a gold standard, but caused extreme suffering for the civilian populations of Germany and Austria for five years after the war.
While Americans returned to their isolation in North America and enjoyed the roaring 20s complete with new washing machines and radios, Germans and Austrians were living through a nightmare made reality.
Every year after the war ended in 1918, life became worse than the last for Germans and Austrian civilians as they were coldly and knowingly crushed in a nightmare of poverty, violence, and starvation by allied politicians and bankers.
This complete economic and social disaster culminated in 1923-25 with the Occupation of the Ruhr Valley when Germany, who could not meet war reparation payments and did not have an army to defend itself, was again occupied by French and Belgium military forces.
The German mark hit hyperinflation as unemployed men died of starvation in the streets, women sold themselves as prostitutes just to feed their children, clashes between socialist and nationalist militias became common, farmers were killed by starving city people who would ride bicycles out into the country on food raiding parties, and the printing presses ran at full speed 24 hours a day printing 1 million, 50, 100, 500, then 5 billion, and finally 10 billion mark notes in an effort to stay ahead of inflation.
When Germany revalued the mark and moved to a new currency for stability, the government left people holding sovereign bonds who thought the government would honor their bond commitments completely destitute.
This hammered the middle and upper classes of society who held sovereign bonds or had pensions and couldn’t fathom moving their savings to a stronger, more stable currency like the Swiss franc early on during the crisis despite their bankers pleading with them to do so.
People falsely believed they were safe in government bonds, thinking their government would honor those commitments, and as a result lost everything along with the poor and unemployed of the country.
Who didn’t lose everything?
The people that moved their savings over to the US dollar and Swiss franc early in 1918 seeing the direction being taken by politicians and bankers.
Those people were able to buy large swathes of income producing assets later on as companies and people who were all leveraged to extremes, thinking they could pay for assets with ever more devaluing marks forever and saw their stock prices soaring, were suddenly crushed when the mark was revalued in deflationary shocks admist the raging inflation which sometimes saw violent moves of 50% in a day in both directions.
If you had dollars or swiss francs, as the mark plummeted in value against currencies, it was like a giant yard sale, everything in the country was for sale.
You could buy baby grand pianos for a dollar, farms and factories at bargain prices, or rent the entire Berlin Orchestra for a private concert during dinner for two dollars American.
Not per person, $2 for the entire ensemble, that is how crushing the hyperinflation was to Germans.
Through all of this, violence in the streets, people not able to afford basic necessities, soaring equity prices as people desperately tried to stay ahead of inflation by betting in the market, or bond investors finally being left destitute, the German Central Bank never took responsibility, saying instead they were doing their best to provide the liquidity the market required.
Where have I heard that before.
The Reichsbank President resolutely insisted through all of this the amount of money being printed had nothing to do with the falling purchasing power of the mark and the havoc happening throughout the country as a result.
Bankers and politicians said the mark losing value was due solely to the exchange rate against other currencies, cost of imports, the fault of currency speculators, and actually not being able to print enough notes to stay ahead of it all!
There is nothing wrong with the market, it is the fault of WallStreetBets.
For the big four central banks of today, the Federal Reserve, Bank of England, Bank of Japan, and European Central Bank they will never have the problem the Reichsbank President had being limited to money creation by the size of bank note and speed at which the printers can run.
Today, they simply enter ones and zeros into a computer to create trillions of dollars, yen, pounds, or euros.
When you hear the Federal Reserve Chairman saying the Federal Reserve is providing liquidity to the market, that is exactly what they are doing.
Trillions so far this year.
When they do that, makes the dollars in all of our bank accounts worth less.
This is why people today buy assets at any price, whether stocks or real estate, and count on the central bank to keep markets trending higher and inflation positive to increase the value of their assets over time.
Of particular note on the Weimar republic is the rate of inflation in those five years.
In 1918, $1 equaled 4.2 German marks
By 1923, $1 equaled 4,200,000,000 German marks
That is not a misprint.
4.2 billion marks to the dollar from 4.2 marks five years before.
And people think bitcoin at $500,000 is crazy with a Federal Reserve hitting a trillion on the keyboard?
In 1923, to curb inflation, the Reichsbank issued a completely new currency, called the Rentenmark.
The Rentenmark was backed by land, dubious at best, since swamp land in Bavaria wasn’t really a liquid form of collateral to back a currency.
But at this point in time you had retired Prussian military officers buying baby diapers to sell on the street because they held their value better than their pension, so after five years of violence and starvation, people didn’t care about swamp land backing a new currency, they were just desperate for stability.
The Reichsbank set the exchange rate at 1 Rentenmark = 1,000,000,000 German marks
The same bankers and politicians which caused the hyperinflation then turned around and five years later annihilated everyone by revaluing the currency.
The bankers and politicians wiped out teachers, retired military officers, wealthy industrialists, foreign speculators. Everyone.
With central banks currently working on their own digital currencies, no idea how they end up pegging a digital dollar to a current dollar, but in a world where the US dollar and treasuries are held as reserve assets by nations for global trade and by people who don’t trust their own currency all over the world, what happens to all those dollars and treasuries once the central banks of the world are more closely coordinated and the world is on digital currencies?
What are the odds the US dollar, currently accounting for almost 70% of global trade settlement, while US GDP only accounts for about 20% of world GDP gets to keep that advantage after Bretton Woods 2.0?
Depending on how Bretton Woods 2.0 and digital currencies are implemented, all those dollars and treasuries held overseas which the US has been exporting since 1974 when Saudi Arabia started pricing oil in dollars will be coming back to the United States.
An easy way to wipe out that debt and dollar inflation would be through some kind of conversion rate to the new digital dollars.
Bitcoin provides a way for me to sidestep that very real risk and be outside central bank digital currencies which are coming as a reality sooner than we think.
Remember, governments will always do what is best for the majority to maintain social stability, and the majority of Americans don’t have bonds or even dollars. For those of us who have wealth, fact is we will always be out voted, are in the minority, and need to manage risk accordingly instead of ignoring possibilities.
The Roaring 20’s
In 1925 a few countries tried to go back on different gold standards.
While Britain went through a very painful depression and chose the path of deflation to try and take the money they had printed during the war back out of circulation through higher interest rates in order to re-peg the pound at it’s previous gold equivalent to keep bondholders whole, France chose a different path, and inflated their currency setting the franc at a higher value than 1914 to gold.
As a result, the French economy flourished while the British economy suffered despite having an 800 credit score for bondholders.
This period was the start of Keynesian economics, where John Maynard Keynes looked at France as a model where mild inflation was good for a country and the economy.
The United States economy was roaring, producing new technological inventions like cars, washing machines, and radio.
By 1927, both England and France convinced the United States central bank they should raise interest rates by half a percent.
They were trying to curb the rising US stock market which was sucking liquidity out of the rest of the world, as no one wanted to miss an opportunity to get rich.
This exacerbated the problem of Europe not having enough capital and still trying to recover from the war.
The half a percent interest rate raise in 1927 would lead to the crash in 1929.
After the stock market crash of 1929, for almost two years, central bankers thought they had adverted a banking crisis while successfully reigning in speculation in the stock market.
But after letting a lower tier bank fail in 1931, the contagion quickly started to spread as banks failed across the country, spread to businesses, who unable to get capital, went bankrupt.
This is why central banks today do not let banks fail, and are quick to provide liquidity to the market, they are like generals fighting the last war, scarred by the lessons of 1931 and one bank failure leading to systemic collapse.
The Great Depression and Gold Confiscation
Politicians are all the same, and Franklin Delano Roosevelt (FDR) was no different.
During his campaign in 1931 he frequently talked about how the US government could not default on its debt obligation.
This is the same thing as saying the United States shouldn’t devalue its currency.
Then, less than a month after being sworn in as the 32nd President of the United States in 1932, he did exactly the opposite.
He made it illegal for Americans to own gold and Congress passed a law that all bonds and debt obligations could now pay in paper dollars instead of gold so bondholders had to accept being paid back less than they were owed as the dollar was devalued.
The US government inflated the money supply and devalued the dollar by raising the price of gold to $35/ounce in 1933 from the previous $20.63/ounce in 1932.
This devalued every dollar in every American savings account by 41%.
Someone who turned in a 1-oz gold coin in 1933 received $20.67, but one year later in 1934, if they had been able to buy gold, they would have only been able to buy 0.59-oz of gold with the same $20.63.
Since 1933, the Federal Reserve has never stopped devaluing the dollar.
87 years later, the price of gold is now $1,929.13
A 1-oz gold coin from 1932 has a compound annual growth rate (CAGR) of 5.35% for the last 87 years.
So we have lost 5.35% of our purchasing power in dollars each year for the last 87 years since 1932.
Now, a common question is what about making bitcoin illegal or confiscating it like the government did with gold in 1932?
I doubt bitcoin is worth the trouble, hiking property or income taxes would net the government more income with less hassle.
Even if most countries joined together and outlawed it, you would have to shut the internet down on the entire planet, and there will always be some small country that doesn’t join in as a way to attract capital.
Look at what Dubai built by simply having no income tax in the desert where the summers are 130 degrees. They went from being a backwater fishing and pearl diving village in the 1950s to a metropolis in the desert with the world’s first 7-star hotel and the tallest building in the world.
There will be some small country that wants to repeat that feat and welcomes bitcoin.
Most important to me though is in 1932, gold underpinned the entire United States monetary supply. The Federal Reserve was required to maintain a certain amount of gold reserves in relation to how much currency was in circulation.
For them to print more money, had to get more gold.
Best way to do that was to confiscate it from people, which allowed them to increase the money supply for the government programs FDR promised which got him elected.
The United States or any central bank for that matter, no longer has to worry about that since every government in the world is off their gold standards.
They can now just hit a button on a computer to print money, so would not need to confiscate bitcoin like they did gold in 1932 when gold backed dollars.
1944 - Bretton Woods, New Hampshire
World War II was coming to a close when delegates from the 44 allied nations met at the Mount Washington Hotel in Bretton Woods, NH to come to an agreement on how to regulate the international monetary and financial order after the war.
The United States was the only country in the world remaining on a gold standard in 1944, albeit not at the same dollar value as before 1932, having now amassed over 2/3rds of the world’s gold reserves and was the only nation with a largely intact navy.
The clear victor both militarily and economically.
If the 19th century had belonged to the British Empire for world trade, the second half of the 20th century would belong to American hegemony.
Using the US dollar for world trade when the US had +60% of the world’s gold reserve and the US GDP accounted for over 60% of the world economy made a lot of sense as Europe and Asia imported American goods to rebuild their countries and economies.
Americans also now provided global security on the oceans for this trade, ensuring all of its allies could go wherever they wanted and trade with whoever they wanted.
All they expected the allies to do was stand with America against her enemies, not fight amongst themselves, and keep their currencies pegged at within 1% to the US dollar which was in turn pegged to gold at $35/oz as the last gold standard on earth.
Which is why the IMF is now discussing Bretton Woods 2.0.
The world doesn’t want the dollar representing 70% of global trade when the US GDP only accounts for 20% of world GDP.
The IMF Director’s mission for Bretton Woods 2.0 includes fighting gender inequality by building girls schools and wifi in sub-Saharan Africa, fighting global climate change, and forgiving the debt the poor IMF members who cannot pay back their loans, so wealth redistribution.
Even if these unelected bureaucrats were the right people to take on those challenges, which they are not, they cannot do anything without the United States, and the US is not interested in maintaining global order anymore.
While I do not have a finance degree and didn’t get a masters in global relations from George Washington University, I have listened to a lot of history books on audible and been escorted by UN forces in armored personnel carriers with 50 caliber machine guns in Sub-Saharan Africa because the rebels were restless.
If you ever want to see what true human suffering looks like, spend some time in sub-Sahara Africa. Was once looking out the window on mission and saw a dude with an RPG strapped across his back ride out of the brush on a camel and shoot a farmer in his field.
I have zero idea how you fix tribes fighting over ground, the people there don’t even know how to fix it.
But I am damn sure a group of unelected bankers at the IMF are not the ones to do it, and am also sure they will try, which is why I buy bitcoin.
No doubt they will throw trillions of dollars at those problems which aren’t theirs to solve and accomplish little besides a massive waste of money and time.
1971 - The Death of the Last Gold Standard
The first swap lines ever established by the Federal Reserve was in March 1962.
Initially with France, then by the end of the year with nine other central banks. What started out as small, short-term loans of dollars to foreign central banks grew to be large, intermediate loans until President Nixon closed the gold window in 1971, ending the convertibility of the US dollar to 1 ounce of gold at $35.
Swap lines growing in size and permanence was not a sign of economic health at the end of the last gold standard, so not sure why people believe central bankers today when they say extending swap lines increases economic stability.
More like Chairman Powell now has his hands over the world’s hands holding the deadman switch on a derivates bomb and he can’t let go lol.
Initially after World War II the US economy was so large compared to European and Asian markets, the demand for US goods, services, and dollars was high and they imported from the United States to rebuild.
Fast forward two decades to the 1960s and world trade had started to equalize, the economies of the US’s allies had recovered and were becoming competitive with US exports.
This meant the need for US imports decreased, and since countries didn’t need to buy US goods anymore with their economies rebuilt, it became more desirable for countries to trade in the US dollars they received for their exports for gold and to start rebuilding their gold reserves.
That’s right, we’re back to the rule of 19th century empires, countries using gold reserves to negotiate from a position of strength.
So when given the choice between paper US dollars which were being printed at increasing rates by the Federal Reserve to meet demand throughout the 1960s while the US gold reserve only increased fractionally, countries started to trade in US dollar reserves for gold which was deemed to have higher value compared with the diluted dollars.
Eventually it reached the point where the total amount of dollars held by foreign countries (eurodollars) exceeded the total amount of gold held by the United States!
Once again, governments do not give up their gold, and when they need to, will change the rules.
In 1971, President Nixon announced the gold window was closed, meaning no one could ask the US government to give them an ounce of gold for $35 and all the governments of the world which had dollar reserves were now stuck with those dollars.
From that point on to modern day, no paper money on the planet, printed by any government is backed by gold or anything else other than that government and people’s faith in their currency.
The Secret Saudi Deal and Black Gold
With the tether to gold now cut in 1971 and US dollars continuing to be printed, the United States battled inflation in the 1970s with interest rates rising to nearly 20%.
In 1974 the US reached a secret deal with Saudi Arabia to price all oil in US dollars and finance America’s expanding spending deficit by getting Saudi Arabia to invest their growing oil wealth in US treasuries, thereby handcuffing America to a psychopath who bullies the entire Persian Gulf region and is the largest exporter of terrorism on the planet.
At the time, the threat of Soviet Russia gaining influence in the middle east was a higher threat than terrorism. Realpolitiks isn’t pretty.
Every country in the world that imported oil from OPEC now had to hold US dollars in reserve to pay for their oil shipments.
This is how US treasuries became the most liquid bond market in the world and the preferred treasury asset for nations and large multinational corporations to hold.
In return, Saudi Arabia, who can’t fight type 2 diabetes, much less any armed conflict on their own, came under the protection of the US led global order.
Been nothing but one desperate geopolitical move after another since that fateful day in June, 1914 for the world trying to get back to a standard.
The Current And Timeless Problem
As bankers and politicians tell you negative interest rates are good for you, what they are really saying is your time, the one thing none of us can ever get back, now has no value. That is the problem we now all face and why I buy bitcoin.
Montagu Norman, the Governor of the Bank of England from 1920 to 1944 knew it would come to this.
He fought hard for England to return to the gold standard after World War I because he knew that an unconstrained currency would be devalued over time and steal people’s ability to save and earn a safe return on their work.
He succeeded for a few brief years, but it wasn’t easy for him, and Winston Churchill hated him for the rest of his life for it because it was unpopular politically for Winston.
Eventually the world’s central banks, having never recovered from the mortal monetary wound of World War I would turn to a radical change in monetary policy being provocatively preached by a young British economist by the name of John Maynard Keynes.
Keynes would go on to become the father of Keynesian economics, which is what the world’s central banks now run on because it allows them to inflate away debt over time.
So now here we are, near the zero bound on interest rates, and what politician or central banker really wants to raise rates and cause the market to correct and businesses who are massively in debt to go bankrupt when everyone’s retirement is now tied to the stock market?
Politicians wanting to stay in office will always bow to public pressure at the ballot box to inflate the money supply and lower interest rates because that requires less pain than deflation which causes businesses to shutter and lays people off even if it does preserve people’s ability to save money and earn a high rate of return on savings.
There are no bad guys in this story, just everyone with their own problems doing what is best for themselves. I am trying to protect my family and capital, bankers are trying to not get fired, and politicians are trying to be reelected.
It is completely understandable when looking back at the decisions previous generations made.
People can evaluate for themselves if they want to have a portion of their net worth in an asset which is not dependent on politicians and bankers.
For me after studying history, whether inflationary or deflationary, bitcoin is a way to save value outside the system.
It hasn’t been a smooth journey since June 1914, but over a century later, we find ourselves still solving for the same timeless problem.
How can I best save value in a liquid form until I can wisely invest in productive assets for the future?
See you out there, Radigan