Monetary centralization or decentralization?
The First World War marked a turning point in global monetary history. This conflict ended the era in which free markets determined monetary means, ushering in an era in which governments assumed complete control over money.
World War I marked a milestone in global monetary history. This conflict ended the era in which free markets determined monetary means, ushering in an era where governments assumed complete control over money.
Although gold continued to play a crucial role as backing in global monetary systems, government decisions and policies began to influence the economy more than the precious metal itself. Thus, "fiat money" emerged. The term comes from the Latin fiat, meaning "let it be," and describes a type of currency created and regulated by government decree. However, it is important to differentiate between money convertible into gold and irredeemable money, both of which are managed by governments.
Under the gold standard, paper money was redeemable for physical gold, limiting government control over the amount of money in circulation. Under irredeemable money, however, paper money and government debt function as currency, allowing governments to adjust their supply as they see fit.
Despite its decreed nature, fiat money did not arise exclusively from government mandates. Originally, these currencies were typically convertible into gold or silver, which ensured their acceptance and value. So much so that central banks still hold reserves in gold or other currencies backed by this metal, emphasizing that no fiat currency circulates without some form of tangible or implicit guarantee. But despite these guarantees, fiat money faces inherent risks. Its flexibility to increase supply can lead to rapid devaluation and the impoverishment of those who hold it.
In the first weeks of the conflict, the major European powers abandoned the convertibility of their currencies into gold. This decision allowed governments to print paper money in virtually unlimited quantities to finance their war efforts. Unlike previous eras, where conflicts were restricted by the actual financial capacity of governments, this new flexibility extended the duration and intensity of war. Nations no longer relied solely on the resources of their treasuries or the imposition of direct taxes on their citizens; They could now turn to inflation as a financing tool.
The value of European currencies experienced a significant devaluation against the Swiss franc, which was still backed by gold. While the currencies of Germany and Austria lost almost half and two-thirds of their value, respectively, other nations, such as the United States and the United Kingdom, suffered smaller depreciations, thanks to more stable and resilient economies. Inflation, which had previously been a more controlled phenomenon, became a tool to finance government expenditures, such as wars or public programs, at the expense of citizens. Without the need to directly raise taxes, governments could print money, reducing the value of the currency in circulation and indirectly decreasing the wealth of those who owned it.
Friedrich Hayek called this phenomenon "monetary nationalism," highlighting how money ceased to be a neutral medium of exchange and became a political instrument.
When we talk about Bitcoin and its decentralization, we mean that no central bank or regulatory body can alter its limited supply, making inflation impossible. A great reflection of this is that, since Bitcoin's creation in 2009, the supply of US dollars has doubled, triggering a dilution in its value and a reduction in the purchasing power of people who use US dollars as a store of value.