In my more recent newsletters, I have been delving deeper into the evolution of modern money and how this relates to the development of Bitcoin, as it is helpful to understand where we have been to know where we are going.
Napoleon is believed to have said,
“History is a set of lies agreed upon”,
And Winston Churchill is thought to have said,
“History is written by the victors”.
As far back as the early 1700s, Robert Walpole, Britain’s first Prime Minister, is quoted as saying,
“Oh, I do not read history for I know that it must be false.”
So, establishing what exactly happened all those years ago with the beginning of modern money is a delicate task at best. It is hazardous to draw definitive conclusions.
Nevertheless, the information we do know paints an illuminating picture worth exploring.
In my newsletter, Bitcoin and the Gold Standard. I explain what is known about how the Bank of England was set up, particularly concerning the basis for a fractional reserve. I also mention how Sir Isaac Newton had a pivotal role in establishing the new currency of England by being made Warden of the Royal Mint and his role in beginning the transition of the nation’s currency from silver to gold.
The Enlightenment
The 17th century was characterised by a transition from the scientific revolution to the Enlightenment era. Wikipedia states that some authors define the peak of the Scientific Revolution and the beginning of the Age of Enlightenment as coinciding with the publication of Isaac Newton’s ‘Principia Mathematica’ in 1687.
The Age of Enlightenment is thought to have ended in 1804 with the death of Immanuel Kant.
The Age of Enlightenment was a time when new forms of thinking were rapidly taking shape, and the movement proliferated through local meetings and correspondence between notable figures throughout Europe and America.
Disputes over religion had much blighted the previous decades. Many Enlightenment scholars remained deeply religious but sought to understand their faith in new ways without the limitations, as they saw it, of the dogma of the Catholic Church, which had held substantial power for many centuries.
Isaac Newton had a pivotal role in this with the publication of his Principia Mathematica in 1687, just nine years before the establishment of the Bank of England. His influence as a scientist and his support for the Great Revolution, which saw the expulsion of the reigning Catholic King, James Stuart, and the invasion and establishment on the throne of England of the Dutch William of Orange, as a way of moving forward into a new Protestant era, tied in very neatly with the establishment of the Bank of England.
Joint Stock Companies
With the establishment of a fractional reserve at The Bank of England, new ideas and methods began in finance, and the careful administration of these new ideas built the foundations of the British Empire.
In the beginning, though, it was a rocky journey. Overspending quickly led to government debt – a topic I will explore more in my following newsletter. Attempts to repay that debt led to innovative schemes such as the Southsea Company, as discussed in my last newsletter, ‘Bitcoin and The Southsea Bubble’. In those days, unpaid debt would have enormous consequences in the life of the average person who could end up in a debtor’s prison, so debt was seen as a severe crime, and the accumulation of debt by the country had political implications that needed careful handling, which usually meant in secret.
Just before the culmination of the Southsea Bubble, the Bubble Act passed, which forbade the formation of a joint stock company unless the company had a royal charter. Wikipedia argues that the government did this to stave off competition for the Southsea Company in terms of investment. The government extended the Bubble Act to include British colonies in 1740. This legislation strangled the development of companies and company finance until it was repealed over one hundred years later, in 1825.
Currency Debasement
While company finance was an innovation the population would not explore for another 100 years, much work was needed to develop a banking system. Since ancient times, there have been many recoinages and debasements, usually associated with a king’s or emperor’s wasteful spending, a famous one being that of Henry VIII, leading to a recoinage issued under his daughter Elizabeth I to rectify the situation.
A similar crisis faced William of Orange when he ascended to the throne thanks to the spending required under the reign of the previous Stuart Kings fighting the English Civil War.
With the establishment of the Bank of England and efforts to route out counterfeiting undertaken with the careful and disciplined eye of Isaac Newton – Britain laid down a firm financial foundation. The Mississippi bubble that brought France to its knees and damaged its currency for decades, leading to the French Revolution, was avoided in England thanks to these advantages.
Currency Creation
As a result of the cushion of a carefully and politically well-managed fractional reserve, the ability to borrow money and take more significant risks allowed The Bank of England to recover where others failed.
Those of us who have been in Bitcoin for a while and who understand the effects of money creation will recognise the impact of additional money creation due to leveraged loans on an economy, and Wikipedia reports that England was unusual at the time in that its population grew 280% from 1550 to 1820. Seventy per cent of European urbanisation happened in Britain from 1750 to 1800. By 1800, only the Netherlands (with the Central Bank of Amsterdam preceding The Bank of England) was more urbanised than Britain.
It is also possible to surmise that as the new fractional reserve agreement in the statute of the Bank of England was not well known, it would have been advantageous to those who did know about it and had the power to wield its advantages.
The government at this time was notoriously corrupt, and it is thought that Robert Walpole could only sustain his position as Prime Minister for twenty years through royal favour and by bribing the right people. Paying for influence was common then and not the scandal that it is seen as today.
New Ideas
In the meantime, the Enlightenment period continued to flourish. Societies were created throughout the newly formed United Kingdom of England and Scotland (1707), where enquiring minds could meet to discuss their scientific ideas and create new inventions.
It was in 1723 that the first Masonic Grand Lodge opened in London. The movement’s popularity grew exponentially in the following years, with lodges appearing in many of the main towns of England and later across the world. A more informal gathering included the Lunar society that centred around Birmingham in the 1760s and was regularly visited by Benjamin Franklin – also a known Freemason.
These new societies came up with innovative ideas and inventions. Some of these were disturbing to the public, who nicknamed members of the Lunar Society ‘Lunatics”.
Expanding on the scientific revolution, the ideas spawned by ‘The Enlightenment’ grew in parallel with the fledgling banking system, which could provide the resources to fund these new ideas. Connections with influential people through community networks also offered significant advantages. At the same time, the newly established gold standard at The Bank of England ensured that as silver left the country, thanks to Newton’s influence, Britain was gradually and quietly building its gold reserves while the rest of Europe still transacted in silver.
Bank Notes
Part of the remit of the Bank of England was to print banknotes. Some other banks had this privilege for a while, at the beginning of the 1700s. Still, the Bank of England gradually established a monopoly, thanks to its royal charter and management of Britain’s government debt. So, incrementally, the notes of other banks faded out of circulation.
Standardised printed notes were introduced in 1745. Around the same time, the first cotton mill began operating in England. As science and innovations developed, there was a requirement for more investment to create larger factories, goods and machines. Some of these projects were too large for individuals to consider doing by themselves, so they reached a stage where they could no longer expand purely on their own resources. The idea of people getting together to invest in projects locally, not just internationally, as with the East India Company and the Southsea Company, began to take off.
Local Banking
Since the government had banned the formation of companies without a specific royal charter, building societies began to be established. Local communities would work together to help fund the house-building for their members. Once all of the members owned a house, the society was dissolved. This popular idea spread from the Midlands throughout the rest of the UK from 1775.
This was the genesis of the explosion of banking. It was in 1776 that Adam Smith published his book, The Wealth of Nations, which advocated for banking and free trade, which helped to create conditions where currency could circulate freely in the economy. He argued that this free circulation of currency helps to ease economic transactions and thus create prosperity. I discuss this more in my newsletter ‘Bitcoin and Property Rights’.
In 1792, the New York Stock Exchange was founded, and by 1810, mutual savings banks had been set up; by 1855, banknotes without the payee and a cashier’s signature were finally in circulation.
Industrial Revolution
All of these factors contributed to the development of the Industrial Revolution. Many historical commentators argue that banking developed due to the Industrial Revolution. However, it would seem the Industrial Revolution was only possible WITH the establishment of banking. The First Industrial Revolution is thought by historians to have begun in 1760, Seventy years after the establishment of the Bank of England, just as national banking began to take off. It is generally understood that the first Industrial Revolution ended about 1830, coinciding with the financial panic of 1825, when the Bank of England withdrew currency from circulation to restore the Gold Standard, having suspended it to pay for the Napoleonic Wars.
Once the economy had recovered from the panic of 1825, and was stimulated by reforming the Bubble Act to allow more businesses to form as companies in the same year. The Second Industrial Revolution began around 1870 and ended in 1914. This, of course, coincided with the outbreak of World War One, which, as I have explained previously, led to the beginning of a permanent break with the Gold Standard. It has not been possible for the world economy to operate on a pure Gold Standard since this time.
Frictionless Money
Indeed, continuing to use money in these circumstances has been a remarkable achievement owed to the banking system. Banking facilitated the circulation of money in the economy in a way impossible before banks were invented. In an environment where gold and silver were the best available inventions for money, banking overcame the difficulties of weight, transport and safety to provide the global economy with a form of money that operates with less friction.
Unfortunately, as humanity inevitably had to reckon with the lessons brought about by corruption, greed and war-mongering, the government adapted systems to allow banking to continue in the absence of any other superior option.
Not any more, however. The creation of Bitcoin is designed to mimic the economic properties of gold in an almost impossible way to change, with the accelerating potential to match the frictionless benefits of banking—providing an advancing step in the evolution of money.
Societal Shift
The Industrial Revolution is considered advantageous as goods became more affordable and accessible, and there was a rapid evolution of labour-saving inventions and a rapid evolution in medicine.
The average person in the middle class achieved enhanced wealth and quality of life, and there was a rise in specialised professions. Some Keynesian economists may argue that these advantages indicate a clear benefit from money creation, but were these advantages due to money creation or due to the reduced friction of currency flowing through the economy due to banking, as advocated by Adam Smith?
On the downside, the Industrial Revolution brought about overcrowding of cities and industrial towns, pollution and other environmental ills, poor working conditions and the rise of unhealthy habits. A clear differential developed between the elites and entrepreneurs who understood how the new money worked and had the connections to take advantage of this knowledge. Compared to the uneducated average workman, who experienced abject poverty if unable to sell his skills for a decent wage. A wage that would continue to devalue, as money created through leveraged debt would linger for over 300 years!
As a new evolution in money is adopted—the population having clear incentives to do so. It will effect profound societal changes, similar to those of the Industrial Revolution, but hopefully in a healthier way. Humanity having learned some valuable lessons about what happens when corruption, greed and war-mongering are left unchecked. These changes are almost impossible to imagine today. As the foundation of our money experiences a 180-degree change, our society will likely experience a similar shift.
I will continue to explore these changes in further newsletters. In the meantime, for those who want more, I have touched on these themes in my Book Truth Decay – How Bitcoin Fixes This, for those who have yet to read it.
It is truly an exciting time to be alive, and I look forward to sharing it with you!
Until next time, enthusiasts!
Victoria
Bitcoin Chat - September 2023
The development of Bitcoin is constantly evolving – In this latest video, I discuss some of the current issues surrounding Bitcoin with some of my colleagues on The World Crypto Network.