In my book Truth Decay – How Bitcoin Fixes This, I ask my sister what gives our money value. She responded that gold backs the value of money in the bank. When writing my book in 2019, I shared that according to a recent study, 29% of Americans still believe that gold held in a bank provides their money with its value.
This failure in education is not ours but is a symptom of the systems we have grown up in. Unless we take the time to learn the truth ourselves, we live in a fog of being unable to recognise that we just do not know what we don’t know.
Background
My newsletters highlight this knowledge, which our education systems woefully neglect. The lack of insight into the intricacies of financial matters also leads to a lack of discussion and conversation in our everyday language. Considering that money is a subject that profoundly affects our lives, I believe providing this information in an accessible way is a worthy endeavour.
My recent newsletters, Bitcoin & The Poverty Line, Bitcoin & the Gold Standard, Bitcoin & the Southsea Bubble and Bitcoin & Banking, have laid the foundation to understand how prominent private shareholders established our modern money, and they also hint at how our prominent thought leaders continue to hoodwink us over this subject.
In this newsletter, Bitcoin & Debt, I enlighten you on how debt, rather than gold, has become the foundation of our modern money system. I provide another chapter, assisting you in successfully navigating our world’s financial minefield and emphasising why this makes Bitcoin, as a form of sound money, so important.
Henry VIII and Usury
In September’s newsletter, I outlined what we know about the history of modern banking, extending from the establishment of the Bank of England.
It is worth understanding that around 1694, when the new King William of Orange approved the establishment of the Bank of England, issuing debt was still a relatively taboo subject. The Catholic Church condemned usury (the payment of interest on debt), which was first overturned in England in 1545 after the Pope excommunicated Henry VIII.
Henry VIII had a massive effect on English finances in this way, and along with dissolving the monasteries and stealing their treasures, he debased England’s currency. The locals nicknamed him ‘Old Coppernose’ as the thin silver plating on the coins would rub away at the area of the king’s nose, revealing the copper underneath!
Henry VIII’s daughter, Queen Elizabeth, also played a significant role in the nation’s finances by reissuing the coinage to restore the reliability of England’s money.
The protestants argued for the reinstatement of usury laws after Henry VIII’s death, but then the restrictions on usury were removed permanently in 1571, so the slippery slope began…
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The Bank of England
Things change slowly, though. The chaos created by the religious strife in the 1500s extended to the civil war in England in the 1600s. The English Civil War ultimately culminated in ‘The Glorious Revolution’ of 1689 when William of Orange from the Netherlands and a committed protestant, married to the eldest daughter of the Catholic King, established himself on the throne of England in a bloodless coup.
The Establishment of the Bank of England quickly followed in 1694.
Joint stock companies had enjoyed remarkable success in the Netherlands and had contributed to the growth of the wealthy Dutch Empire in the 1600s.
The proliferation of joint stock companies migrated to England with William of Orange and enabled the formation of The Bank of England. Parliament gave the bank a mandate to issue bank notes, and the Bank obtained a Royal Charter courtesy of William. The Bank’s management of the debt of the English government eventually gave it a monopoly on the practice of issuing bank notes.
English Debt
In June’s newsletter – Bitcoin and the Gold Standard, I explained how shareholders set up The Bank of England with an initial loan of £1.25 million. I have yet to mention that within four years of the establishment of the Bank of England, the extent of the debt owed to the Bank had ballooned to £16 million due to wars fought by the newly crowned William of Orange with King Louis XIV of France.
Recall that Parliamentarians established the Bank of England in law, committing the British public to the responsibility for debt repayment.
Not only had the debt owed to the Bank of England grown to £16 million through the pursuit of wars. Government spending had progressed unmonitored, and it was only due to an investigation conducted in 1711 by the Chancellor of The Exchequer, Robert Harley, which revealed that government administration expenses had grown to an additional £9 million!
Increasing Wealth
It, indeed, was an extravagant time. No wonder such prominent buildings and works of art extend from that period. The wealth unleashed due to unrestrained spending by the government must have been staggering compared to what people had seen in the past.
As mentioned previously, 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.
In August’s newsletter, Bitcoin and the Southsea Bubble, I explain how this new freedom with finance led to great irresponsibility regarding the nation’s money. The use of joint stock companies as a legal tool to collaborate financially and address government debt was also misused and led to great poverty for many when the Southsea and Mississippi Bubbles finally collapsed. Ultimately, I explain how England’s first Prime Minister, Robert Walpole, resolved the situation in this country with political skill and questionably unique tactics.
National Debt
The English government agreed to set up the Southsea Company to help pay off the national debt owed to the Bank of England. The enterprise, from this perspective, was an utter failure. The government eventually allocated the debt accumulated by the Southsea Company during its ‘bubble’ to the East India Company and The Bank of England. I also point out that the British Government did not finally settle the debt from the Southsea Bubble until recently, in 2015!
These events are highly shady, but with the abandonment of the old morality policed by the Catholic Church, all ideas were on the table to explore, and indeed they were.
The problem, however, is not so much that these financial shenanigans were allowed to happen. The solutions to the problems derived at the time leave us in the predicament we are in today.
Since the establishment of the Bank of England and throughout the last 300 years, government debt has been bundled into a new loan at a renegotiated interest rate whenever governments find themselves in a sticky situation.
Perpetual Mortgages
Think of the owner of a house that perpetually remortgages it. The owner can accomplish this as long as the house continues to go up in value, but once the price of the house collapses due to factors outside of the owner’s control – it’s game over.
As governments and banks create more currency or ‘liquidity’ in the financial system by creating more debt and stimulating spending, the prices of assets (e.g. houses and countries) can rise to cover a mortgage. It has been a remarkably successful strategy. So much so that frighteningly, observing the trend, governments, businesses and individuals worldwide have followed suit. The scale and cost of the debt and the price of assets have grown exponentially ever since.
Unfair Competition
As speculation intensified during the Southsea Bubble, the English parliament passed The Bubble Act of 1720, which prevented the formation of companies and the selling of shares without a royal charter, effectively providing the Southsea Company with a monopoly.
So for 100 years, Companies like the Southsea Company, The East India Company and the Bank of England had an unfair advantage through legal precedent that allowed them to operate in ways others couldn’t.
The English Parliament partially repealed The Bubble Act in 1825. The repeal of the Act was partly an attempt to restimulate the economy, which had suffered from a catastrophic financial crash following the victory over Napoleon at Waterloo.
Liquidity
Parliament had suspended The Gold Standard of the time to fund the Napoleonic wars, which allowed additional ‘liquidity’ into the financial system to pay for them. When this needed to be reversed, ‘liquidity’ was withdrawn from the system to re-establish a gold standard, and hence, the financial system crashed.
This withdrawal of ‘liquidity’ is similar to the Stock Market Crash of 1929 after Winston Churchill attempted to establish a Gold Exchange Standard in 1925 for the British Pound after the empire abandoned the Classical Gold Standard in 1914 to fund The Great War. I discuss this more in my newsletter, Bitcoin & The Gold Standard.
Inflation and Deflation
As time passes, this underlying pattern is crucial to understand. Money moves through the system as banks add more ‘liquidity’ through additional bank notes or characters on the balance sheet to fuel the economy (inflation). It allows people the feeling of becoming more prosperous.
When saner heads prevail and sound the warning bell of financial collapse through hyperinflation, the banks react by withdrawing ‘liquidity’ (deflation) to try and rebalance the system. Still, each time they do this, they are only able to progress so far before the pain becomes too much, and some kind of system failure occurs, such as the events just mentioned and, more recently, the 1987 Stock Market Crash, the 2001 Dot Com Bubble and the 2008 Great Financial Crisis.
The details of these liquidity moves are complex, and there are many other forums where you can hear more details and nuanced arguments. My purpose here is to provide an overview to enable the average person to see the game influential players engage in at their expense.
Since 2008, additional ‘liquidity’ has been added to the financial system to prevent the systemic crisis that was on the brink of manifesting. With some nimble manoeuvring, our global leaders managed to stave off a disaster for several years. However, most countries worldwide are now overplaying their hand and have realised the extent of their errors a little too late. Their attempts to fix the problems, exacerbated by the need for more ‘liquidity’ during the Covid pandemic, have stretched their resources to breaking point.
Rising Interest Rates
The recent attempts by the Federal Reserve, the Bank of England and the European Central Banks to raise interest rates are their strategy to put the financial system back on a firmer footing. Still, the financial system’s problems are way more extensive, and these efforts are unlikely to be successful.
We have seen how this plays out in the past. The 2008 financial crisis arrived on the heels of an attempt to raise interest rates. While interest rates may help stave off the effects of inflation in the short term, all those businesses that now rely on credit to manage the cash flow of their businesses are incredibly vulnerable as banks batten down the hatches and either refuse to lend or make it intolerably expensive.
Many of these businesses and property owners have become comfortable operating with interest rates close to zero for almost ten years. The gradual rise in interest rates creates a systemic shock that takes time to flow through the system. Think of tiny dominoes progressively hitting larger ones, and you can sense what might be playing out.
Bitcoin
Those who study these topics understand how the game will likely end. That is why we support and promote Bitcoin. With Bitcoin as the world’s currency, these games will no longer be possible unless we make the mistake in the future of trusting centralised entities to create debt with our Bitcoin! But even then, the design of Bitcoin would mitigate some of the potential problems.
The current game has yet to play out, though, and so at this time, I continue to urge caution. The issues I discuss in my newsletter from November 2021, Bitcoin – Time to Buy, still apply.
The Bitcoin price has been doing well lately. Rumours of BlackRock’s Exchange Traded Fund (ETF) are fuelling speculation. I have seen this narrative before, though, and it rarely ends well. Rumours of an ETF fuelled the Bitcoin price rise in 2017, but a hefty 80% crash followed.
In the meantime, many financiers and economists are sounding the warning bell of the adverse effects of continued rate rises on the broader economy. They examine the numbers, and they see the dominoes falling.
As interest rate rises continue to create the effect of withdrawing ‘liquidity’ from the system, history tells us what is likely to happen, which is not pretty. A lack of ‘liquidity’ in the financial system will also affect the price of Bitcoin as an asset.
Those fully invested in Bitcoin may need to access these resources in a crisis, which could affect the price negatively. So keep educating yourselves, but please be cautious with your investments. Bitcoin will be a significant solution to the coming crisis, but before then, its price is still vulnerable to a sudden crash. Good luck.
Until next time, enthusiasts.
Victoria
CBDCs - A Dystopian Future?
Are CBDCs leading us towards a dystopian future? Find out here as I present to the Bitcoin Meetup in Surrey.
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Many thanks Victoria. These history lessons are so valuable!
Well done on setting up the Satoshi payments via Muun. Hopefully others will be able to follow your example.
Have you considered publishing your newsletter on Substack.com? It might help you reach a much bigger audience.
Thank you for the praise Alistair, the feedback keeps me going! I have considered Substack, but I am sure you know how all us bitcoiners feel about centralised entities! It may take longer, but this audience will be my own. 🙂